THE  LIBRARY 

OF 

THE  UNIVERSITY 
OF  CALIFORNIA 

LOS  ANGELES 


GRADUATE  SCHOOL  OF 
BUSINESS  ADMINISTRATION 
-  LIBRARY 


SOME   PROBLEMS    IN   MARKET 
DISTRIBUTION 


SOME  PROBLEMS  IN 
MARKET  DISTRIBUTION 

Illustrating  the  application  of 
A  BASIC  PHILOSOPHY  OF  BUSINESS 


BY 

ARCH  W.  SHAW 


CAMBRIDGE,  MASSACHUSETTS 

HARVARD  UNIVERSITY  PRESS 

1951 


COPYRIGHT,  1915,  BY  A.  W.  SHAW 


Third  Printing 
Printed  in  the  United  States  of  America 


.  Admia, 

bMrg 

i—jj 
tr  iiiin 

IMr 


FOREWORD 

FOR  this  printing  of  Some  Problems  in  Market 
Distribution  no  alterations  of  substance  have  been 
made. 

There  are  two  parts.  The  earlier  chapters  in 
the  book  establish  a  basic  philosophy  of  business. 
The  remainder  of  the  text  illustrates  the  applica- 
tion of  this  philosophy  to  problems  of  distribution. 

The  second  part  was  first  published  in  an  article 
written,  at  the  suggestion  of  Dr.  Edwin  Francis 
Gay,  then  Dean  of  the  Graduate  School  of  Busi- 
ness Administration,  Harvard  University,  for  the 
Quarterly  Journal  of  Economics,  August,  1912. 


700247 

INST.  INDUS.  ML, 


SOME   PROBLEMS    IN    MARKET 
DISTRIBUTION 


SOME  PROBLEMS  IN  MARKET 
DISTRIBUTION1 

CHAPTER  I 

THE  NATURE  AND  RELATION  OF  BUSINESS 
ACTIVITIES 

UNTIL  recently  business  has  developed  largely  on 
an  empirical  basis,  though  there  is  a  general 
healthy  feeling  abroad  that  the  business  man 
should  approach  his  problems  in  the  scientific 
spirit  and  should  have  exact  information  to  guide 
him  in  meeting  and  settling  them.  To  that  end, 
departments  for  the  gathering,  classification  and 
interpreting  of  statistics  have  been  organized  by 
many  concerns,  physical  laboratories  have  been 
established  for  research  work  and  tests  of  materials, 
and  special  staffs  of  trained  men  are  maintained  to 
study  every  operation  and  process  involved  in  the 
business  and  to  find  and  apply  the  most  efficient 
known  way  of  performing  each.  The  standards 
thus  determined  serve  not  only  as  internal  econ- 
omies of  the  individual  houses  conducting  the 
inquiries,  but  in  many  instances  have  become 
the  external  economies  of  entire  industries. 

1  The  last  three  chapters  of  this  book  are  reprinted  from  the 
Quarterly  Journal  of  Economics,  for  August,  1912,  published  by  Har- 
vard University. 


MARKET  DISTRIBUTION 

The  individual  business  has  gone  farthest  in  this 
gathering  of  information  and  standardizing  of 
methods.  Records  are  kept  not  only  of  important 
activities  but  of  the  details  which  influence  costs, 
rate  of  production,  ease  in  selling  and  similar  vital 
matters.  Comparative  analyses  and  tabulations 
make  clear  the  relations  between  each  of  these 
factors  and  the  main  purpose  of  the  business,  and 
guide  the  management  in  determining  the  policies 
to  be  followed.  The  facts  and  conclusions  reached 
have  seldom  been  collated,  however,  with  like 
results  attained  by  other  concerns.  The  data  on 
which  any  general  scheme  of  standardization  might 
be  based  usually  have  been  considered  business 
secrets  by  the  house  which  gathers  them  and  some- 
thing to  which  no  one  else  has  any  right  of  access. 

If  the  business  man  looks  to  economic  theory  for 
guidance,  he  may  there  find  generalizations  which 
give  a  sense  of  direction.  The  law  of  diminishing 
returns,  for  instance,  makes  clear  that,  beyond  a 
fixed  point,  increased  expenditure  secures  less  than 
a  proportional  increase  in  product.  Cultivating  a 
market  is  much  like  cultivating  a  field.  Two 
"  doses  "  of  capital  and  labor  may  not  bring  twice 
the  returns  of  a  single  adequate  dose.  There  is  a 
point  at  which  the  rate  of  return  does  not  equal  the 
rate  of  increase  in  expense^  j  The  larger  the  number 
of  salesmen  in  a  given  territory,  the  larger  as  a  rule 
the  total  number  of  orders.  Yet  the  addition  of 


NATURE  OF  BUSINESS  ACTIVITIES 

salesmen  might  be  carried  to  a  point  where  the 
average  of  orders  per  man  might  drop,  the  individ- 
ual expense  remaining  constant,  and  returns  from 
the  field  might  fall  below  the  level  of  profit. 
Another  contribution  of  economic  theory  —  that 
of  the  consumer's  surplus  —  is  discussed  in  the 
course  of  the  book. 

It  remains  true,  however,  that  there  is  no  body  of 
scientific  business  principles  on  which  we  may  rely. 
The  study  of  mass  phenomena  on  which  broad 
generalizations  must  be  based  has  not  yet  been 
organized.  We  have  rules  laid  down  by  successful 
concerns  as  expressions  of  their  practice  or  policies, 
the  traditions  and  proverbs  current  in  various 
industries  and  districts,  and  the  recorded  but 
largely  inaccessible  experience  of  numerous  indi- 
viduals and  organizations.  These  methods  and 
policies,  of  proved  efficiency  in  certain  businesses 
and  under  certain  conditions,  if  brought  together 
and  classified  according  to  their  fundamental  rela- 
tions, could  be  compared  with  methods  and  policies 
which  have  proved  effective  in  other  establish- 
ments under  similar  or  different  conditions,  and 
the  underlying  principles  disclosed  for  the  direction 
of  rational  business  thought  and  the  formation  of 
sound  business  judgment. 

But  after  all,  it  is  by  actually  observing  men  at 
work,  by  studying  them  as  they  drive  nails,  shear 
steel  plates  apart,  build  up  wood  veneers,  tend 


MARKET  DISTRIBUTION 

drill  presses,  crate  finished  products,  calculate 
factory  costs,  fix  prices,  fill  out  order  forms,  write 
advertisements,  pass  merchandise  across  counters, 
negotiate  loans,  collect  money,  adjust  complaints 
and  perform  the  countless  other  operations  of 
which  the  fabric  of  business  is  made  up,  that  we 
can  discover  and  verify  the  nature  and  relation  of 
all  these  activities  and  develop  a  body  of  usable 
and  dependable  principles  of  business  conduct  for 
the  management  of  a  business.  There  are  tens  of 
thousands  of  these  activities  varying  broadly  in 
kind  and  in  character.  Is  there  an  element  com- 
mon to  all  ?  Is  there  any  simple,  unifying  concept 
or  principle,  working  with  which  a  classification  of 
these  activities  can  gradually  be  disclosed  that  is 
obviously  logical  and  practically  usable  ? 

THE  COMMON  FACTOR  IN  ALL  OPERATIONS 

Observe  a  workman  in  a  factory  directing  the  cut 
of  a  planer  in  a  malleable  steel  casting,  and  we  find 
that  he  is  operating  on  a  piece  of  raw  material  for 
the  purpose  of  changing  its/orm;  a  clerk  in  a  store 
passing  over  the  counter  to  the  consumer  a  package 
of  factory -cooked  food  and  we  find  that  his  opera- 
tion results  in  a  change  of  place-,  a  typist  at  his 
desk  making  out  an  invoice  for  a  shipment  of  mer- 
chandise and  we  find  that  he  is  operating  not  to 
change  the  form  of  matter  nor  the  place  of  commo- 
dities but  to  facilitate  those  changes. 


NATURE  OF  BUSINESS  ACTIVITIES 

The  operations  of  business  vary  greatly  in  kind 
but  always  the  essential  element  common  to  each 
is  motion.1  If  you  examine  any  activity  in  any 
field  or  phase  of  business,  the  essential  element 
invariably  will  be  found  to  be  the  application  of 
motion  to  material. 

Starting  with  this  simple  concept  it  becomes  evi- 
dent that  we  have  an  easy  and  obvious  basis  for  the 
classification  of  these  activities.  With  the  philo- 
sophical aspects  of  the  concept  itself  I  am  not  con- 
cerned. Sufficient  that  it  gives  us  a  simplifying, 
unifying  principle  from  which  to  proceed,  instead 
of  a  mere  arrangement  by  kind  or  characteristic,  of 
the  material,  men,  operations  and  processes  which 
we  see  in  the  various  departments  of  a  business 
enterprise.  It  is  not  the  nature  of  the  operation 
that  is  most  to  be  considered.  It  may  be  an  action 
that  is  common  to  all  the  departments  into  which 
the  organization  is  divided,  like  the  requisition  of  a 
dozen  lead  pencils  or  a  box  of  paper  clips.  Or  it 
may  be  a  special  and  individual  process  that  is  not 
duplicated  elsewhere,  like  the  pouring  of  molten 
metal  in  the  foundry  or  the  making  up  of  a  payroll. 
Its  character  alone  does  not  supply  the  key  to  a 
usable  classification.  It  is  not  until  we  look  to  the 
common  fundamental  element  and  inquire:  "  What 
is  the  purpose  of  this  motion  ?  "  that  we  find  the 
key. 

1  See  E.  v.Behm-Bawerk:  Positive  Theory  of  Capital,  pp.  12-13. 

5 


MARKET  DISTRIBUTION 

I  do  not  wish  to  exaggerate  the  importance  of 
this  simple  and  apparently  obvious  idea,  but  for  me 
it  has  opened  a  way  to  locate  the  activities  of  busi- 
ness and  disclose  the  relations  existing  between 
them.  It  serves  not  alone  as  a  key  to  a  classifica- 
tion of  these  activities  and  a  method  of  approach 
to  the  problems  arising  out  of  their  relations  but 
also  as  a  thing  of  every-day  use.  For  the  final 
function  of  this  classification  is  to  locate  those 
motions  that  are  purposeless  and  further  the  con- 
servation of  energy  by  making  their  elimination 
possible. 

This  last  does  not  always  mean  a  reduction  in 
the  total  number  of  motions:  in  our  roundabout 
modern  system  of  production,  with  its  minute 
division  of  labor,  we  may  make  a  greater  number 
and  variety  of  motions  distributed  over  a  longer 
period  of  time  yet  increase  the  eventual  output  or 
decrease  the  cost  through  the  group  effectiveness 
of  all  the  motions.1  If  you  study  an  individual 
motion  or  operation  in  itself  and  in  relation  to  the 
other  activities  surrounding  it  and  no  satisfactory 
answer  can  be  found  to  the  question,  "  What  is  its 
purpose  ?  "  you  have  strong  grounds  for  assuming 
that  it  is  a  non-essential  and  useless  motion.  It 
may  have  the  sanction  of  house  tradition  or  trade 
custom,  but  its  superfluous  character  remains  and 
the  wisdom  of  eliminating  it  becomes  plain.  This 

1  See  E.  v.Behm-Bawerk:  Potitiws  Theory  of  Capital,  pp.  17-20. 

6 


NATURE  OF  BUSINESS  ACTIVITIES 

classification,  therefore,  becomes  also  a  test  of 
efficiency.  Both  from  the  individual  and  the 
social  standpoint,  any  motion  in  business  which 
has  no  purpose  is  a  motion  economically  useless  and 
wrong. 

THE  PURPOSE  OF  A  CLASSIFICATION  IN  BUSINESS 

From  the  manager's  view-point  the  purpose  of 
this  analysis  is  not  alone  to  place  the  activities  of 
business,  to  trace  out  their  relations  and  study  the 
problems  that  arise  out  of  them,  but  to  inquire  into 
each  motion  and  disclose  what  is  its  purpose.  In 
the  three  typical  operations  mentioned  —  those  of 
the  factory  workman,  the  retail  clerk  and  the  office 
typist  —  each  application  of  motion  was  for  a 
distinct  purpose  and  each  instance  was  represen- 
tative of  one  of  the  three  great  divisions  of  busi- 
ness activities. 

1.  The  activities  of  production,  which  change 
the  form  of  materials. 

2.  The  activities  of  distribution,  which  change 
the  place  and  ownership  of  the  commodities 
thus  produced. 

3.  The  facilitating  activities  which  aid  and  sup- 
plement the  operations  of  production  and 
distribution.     No  adequate  descriptive  term 
suggests  itself;  facilitation  is  awkward,  ad- 
ministration is  inexact  because  it  suggests  all 
the  relations  of  the  management  to  a  business 


MARKET  DISTRIBUTION 

rather  than  a  separate  group  of  functions 
towards  which  the  manager  should  maintain 
the  same  sort  of  relations  as  with  those  of 
production  and  distribution.1 

Whatever  the  nature  or  kind  of  any  business 
activity,  its  final  effect  is  one  of  the  three  just 
indicated. 

Pursue  the  inquiry  further,  studying  all  the 
motions  that  contribute  to  production  and  inquir- 
ing the  purpose  of  each,  and  it  is  apparent  at  once 
that  they  fall  into  one  or  other  of  two  groups, 
according  as  they  have  to  do  with  plant  or  opera- 

1  Business  men  and  economists,  though  dealing  with  the  same 
forces  and  the  same  phenomena  do  not  always  agree  on  terminology. 
The  economist  speaks  of  the  agencies  of  production  as  land  (or  natural 
agents),  labor,  capital  and  organizing  ability;  and  he  includes  in  pro- 
duction the  activities  which  the  business  man  groups  separately  under 
the  heads  of  distribution  and  various  facilitating  functions.  To  the 
business  man  the  term  production  covers  all  the  activities  which  are 
concerned  directly  with  the  manufacture  of  articles.  He  uses  concrete 
terms:  plant  and  equipment  instead  of  capital,  materials  instead  of 
land  or  the  products  drawn  directly  from  the  land.  He  uses  the 
economist's  term  in  describing  the  active  agency  as  labor,  but  speaks 
of  organization  rather  than  of  organizing  ability.  It  is  to  be  remem- 
bered, of  course,  that  their  view-points  are  different:  the  economist 
having  the  social  view-point,  the  business  man  that  of  the  individual 
engaged  in  conducting  an  enterprise  for  profit.  In  the  following  pages 
the  language  of  the  business  man  is  used,  though  it  has  been  necessary 
occasionally  to  find  new  phrases  to  characterize  the  re-grouping  of 
activities  which  has  been  attempted.  Any  awkwardness  in  terminol- 
ogy which  has  resulted  will  not,  I  trust,  prejudice  the  reader's  con- 
sideration of  the  ideas  themselves. 

8 


NATURE  OF  BUSINESS  ACTIVITIES 

tion  activities.  Within  each  of  these  groups  the 
line  of  obvious  division  continues:  every  individual 
operation  finds  its  place  naturally  and  without 
question.  The  plant  activities  separate  into  those 
concerned  with  (a)  location,  (6)  construction,  (c) 
equipment  —  the  providing  of  a  ready-to-run 
factory.  The  operating  activities  split  up  into 
those  that  have  to  do  with  (a)  materials,  (6)  the 
men  who  make  the  motions  which  change  the  form, 
and  (c)  organization  —  such  adjustment  and  con- 
trol of  materials  and  motions  as  will  get  the  most 
effective  result. 

THE  BASIC  PRINCIPLE  OF  INTERDEPENDENCE 

In  their  broad  aspects  the  problems  of  location, 
construction  and  equipment  are  parallel  and  inter- 
dependent. No  one  of  them  can  be  solved  and  the 
efficiency  of  the  plant  insured  unless  allowances 
are  made  for  the  inflexible  factors  of  the  others. 
The  operating  activities,  in  their  turn,  are  so 
closely  knit  together  and  so  influence  and  are  in- 
fluenced by  the  plant  activities  that  no  single  factor 
can  be  weighed  and  determined  by  itself  alone,  but 
must  be  considered  also  in  its  relations  with  all  the 
remaining  activities  of  both  groups.  This  mutual 
interdependence  extends  as  well  to  all  the  activities 
of  production,  distribution  and  administration. 

Every  man  of  broad  experience  will  recognize 
this  interdependence,  I  think,  as  a  basic  principle 


r 

r. 


MARKET  DISTRIBUTION 

in  business.  Likewise  its  corollary,  that  a  balance 
must  be  maintained  in  these  relations.  The  ratio 
of  cost,  quality  and  service  observed  in  the  actual 
manufacture  of  a  product,  for  example,  must  be 
the  same  as  that  put  forward  by  the  sales  force. 
Otherwise  customer  dissatisfaction  will  follow, 
internal  friction  will  develop,  and  efficiency,  good 
will  and  profits  all  will  suffer.  Or,  again,  the  atti- 
tude of  a  credit  manager  who  does  not  consider 
the  effect  of  stringent  credit  policies  on  sales  may 
hamper  the  efforts  of  a  capable  and  enthusiastic 
selling  force. 

An  introduction  to  an  essay  on  market  problems 
—  for  that  is  the  character  of  this  first  chapter  — 
is  not  the  place,  however,  to  trace  out  factory  re- 
lations and  dependences.  I  have  indicated  them 
here,  because  in  dealing  with  the  tangible  materials 
and  motions  of  production,  the  application  of  this 
method  of  approach  and  the  development  of 
this  classification  are  more  clearly  illustrated  on 
account  of  the  definite  and  measurable  character 
of  the  things  classified.  On  the  other  hand,  the 
activities  of  distribution,  dealing  with  intangible 
quantities  and  adding  no  objective  utility  to  the 
goods,  though  they  present  a  more  complex  prob- 
lem for  analysis,  yield  to  a  similar  approach  a 
parallel  classification. 

When  we  examine  the  activities  of  distribution, 
the  first  broad  classification  according  to  purpose 

10 


NATURE  OF  BUSINESS  ACTIVITIES 

results  in  two  sub-groups  —  the  activities  of 
demand  creation  and  those  of  physical  supply^ 

The  activities  of  demand  creation  focus  on  the 
consumer.  Their  purpose  is  to  communicate  to 
his  mind  such  ideas  about  the  product  as  will 
arouse  desire  for  it  and  cultivate  willingness  to  pay 
the  price  and  make  the  effort  required  to  secure  it. 

This  aroused  demand  would  have  no  commercial 
or  economic  value  unless  provision  were  made  for 
satisfying  it  by  actual  transfer  of  the  goods  through 
one  or  more  of  the  available  agencies.  The  rela- 
tions between  the  activities  of  demand  creation 
and  physical  supply  illustrate  again  the  persistence 
of  the  two  principles  of  interdependence  and  of 
balance  throughout  the  whole  structure  of  busi- 
ness. Failure  to  coordinate  any  one  activity  with 
its  group-fellows  and  also  with  those  of  the  other 
groups,  or  undue  emphasis  on  any  one  of  these 
activities,  is  bound  to  destroy  the  equilibrium  of 

forces  which  means  efficient  distribution. 
*•— — 

;Xou  cannot  solve  your  first  problem:  How  can  a 
demand  for  this  product  be  created  of  sufficient 
volume  to  make  its  production  profitable  ?  unless 
you  consider  at  the  same  time  the  accompanying  , 
problem:  Through  what  channels  can  this  article 
be  conveyed  from  the  factory  warehouse,  where  it 
is  of  least  value,  into  the  hands  of  those  consumers 
who  will  pay  the  most  profitable,  though  not  neces- 
sarily the  highest,  unit  price  for  it  ?  / 

11 


MARKET  DISTRIBUTION 

The  parallel  with  production  takes  shape  when 
the  activities  of  demand  creation  split  up  into 
those  which  are  concerned  with  plant  and  with 
operation.  It  continues  when  the  plant  activities 
group  themselves,  still  according  to  purpose,  under 
location,  construction  and  equipment:  while  the 
operating  activities  divide  according  as  they  are 
occupied  with  either  materials  (ideas  about  the 
goods),  the  agencies  by  which  these  ideas  are  trans- 
mitted to  consumers  (corresponding  to  labor  in 
production),  and  organization. 

PAKALLELS  BETWEEN  PRODUCTION  AND  DISTRIBUTION 

In  both  production  and  distribution,  plant 
policies  practically  crystallize  after  they  are  estab- 
lished, while  the  operating  activities  present  fresh 
problems  to  the  management  every  day.  In 
demand  creation  these  claims  on  his  attention  are 
multiplied  and  the  difficulty  of  analysis  and  decision 
are  intensified  because  of  the  general  lack  of  stand- 
ards and  because  all  the  factors  engaged  are  quan- 
tities not  easily  measurable,  unstable  human 
relations  or  the  unexplored  complexities  of  market 
psychology. 

The  only  mental  readjustment  this  classification 
requires  of  any  business  man  is  assent  to  the  concept 
that  ideas  about  the  goods  are  truly  materials  of 
demand  creation.  The  terminology  is  new  and  the 
assumption  broad,  but  I  think  it  holds  in  every- 

12 


NATURE  OF  BUSINESS  ACTIVITIES 

day  business.  Certainly  it  simplifies  any  approach 
to  the  problems  of  distribution:  since  ideas  about 
the  goods  are  the  selling  points  from  which  sales- 
men, middlemen,  and  advertising  men  develop 
arguments  and  demonstrations  to  arouse  in  the 
consumer's  mind  interest  in  a  product  and  a  desire 
to  possess  and  enjoy  it. 

Despite  the  fact  that  demand  creation  is  largely 
a  problem  in  applied  psychology,  there  is  a  close 
analogy  between  the  materials  of  demand  creation 
and  factory  materials  —  to  both  of  which  motion 
must  be  applied  in  order  to  render  them  effective. 
Ideas  about  the  goods  can  be  handled  as  definite 
things,  almost  as  tangible  as  raw  stock.  The 
results  they  produce  can  be  measured  with  a  fair 
degree  of  accuracy  —  particularly  in  advertising, 
where  the  personality  of  a  salesman  does  not  enter 
to  confuse  the  issue.  This  means  that  the  sales 
value  of  each  idea  can  be  tested,  that  different 
arrangements  of  the  same  ideas  can  be  compared 
and  that  the  relative  efficiency  of  the  agencies 
employed  for  their  transmission  can  be  determined. 
The  written  and  printed  symbols,  too,  which  repre- 
sent a  given  idea  or  series  of  associated  ideas  can 
be  indexed  and  filed  precisely  as  the  materials  used 
in  manufacturing  are  inventoried  and  stored  until 
the  time  comes  when  they  are  needed  for  use. 

Here  enters  the  value  of  the  concept  that  ideas 
about  the  goods  may  be  treated  as  the  materials  of 

is 


MARKET  DISTRIBUTION 

demand  creation.  Considered  as  materials,  they 
can  be  submitted  to  analytical  processes  like  those 
which  the  materials  of  production  undergo  in  the 
factory  laboratory  in  the  development  of  standards 
by  which  to  measure  their  quality  and  to  guide 
manufacturing  operations.  A  certain  amount  of 
attention  is  given  in  a  later  chapter  to  this  testing 
and  refinement  of  selling  points  —  an  attention 
warranted  I  think  by  the  significance  of  the  idea 
and  its  relative  neglect  in  distribution  today. 

Standards  are  conceded  to  be  indispensable  in 
the  factory  merely  to  direct  and  check  the  buying 
and  processing  of  materials.  Analogous  standards 
are  even  more  effective  in  demand  creation  for  the 
reason  that  every  selling  point  which  proves  itself 
under  test  becomes  so  much  inexhaustible  material 
which  can  be  used  again  and  again  in  diverse  ways 
alone  or  in  combination  with  other  ideas  about  the 
goods,  by  the  different  agencies  available  for  its 
transmission. 

For  all  these  ordered  activities  —  the  gathering, 
classifying,  testing  and  standardizing  of  the  mate- 
rials of  demand  creation  —  the  rule-of -thumb  tribe 
has  its  equivalent  in  the  "  first  sell  yourself  " 
which  is  an  axiom  in  the  practice  of  salesman- 
ship. 

It  may  be  possible,  in  time,  greatly  to  extend  and 
simplify  this  analysis  of  materials.  As  yet  the 
professional  psychologist  has  addressed  himself  to 

14 


NATURE  OF  BUSINESS  ACTIVITIES 

few  of  the  problems  which  engage  the  attention  of 
business  men.1  And  even  the  conclusions  already 
arrived  at  are  rarely  of  practical  value  —  chiefly 
because  the  psychologist,  in  framing  his  tests  or 
phrasing  his  questions,  is  not  always  cognizant  of 
the  things  the  business  man  wants  to  know. 

He  has  been  known  to  submit  a  series  of  adver- 
tisements to  a  group  of  thirty,  forty,  fifty  students 
(themselves  far  removed  in  character,  tastes  and 
purchasing  power  from  the  average  consumer)  and 
to  ask  them  to  indicate  which  is  the  most  effective 
of  the  lot.  Given  like  opportunity,  the  business 
man  would  select  really  representative  subjects 
and  would  put  a  specific  purpose  behind  each 
query:  "Which  advertisement  would  get  your  at- 
tention first  ?  Which  one  would  hold  your  interest  ? 
Which  one  would  stir  curiosity  or  make  you  want 
the  product  enough  to  ask  for  it  by  letter  or  at  the 
nearest  store  ?  "  And  so  on,  breaking  the  single 
question  up  into  perhaps  a  dozen  specific  inquiries 
which  would  give  definite  information  as  to  the 
size,  the  shape,  the  quantity  and  character  of  ideas, 
the  kind  of  illustration  and  the  style  of  argument 
which  would  secure  and  hold  the  reader's  attention 
and  bring  him  to  the  action  desired  of  him  — 
whether  this  be  the  filling  out  of  a  coupon  or  the 
inclosure  of  a  signed  order  and  check. 

1  There  have  been  some  notable  exceptions.  See  Dr.  Walter  Dill 
Scott,  The  Psychology  of  Advertising. 

15 


MARKET  DISTRIBUTION 

The  possibility  of  formulating  standards  for 
things  so  intangible  may  be  challenged  by  the 
average  producer,  no  matter  how  scientifically  he 
has  standardized  his  factory  materials.  For  here 
as  elsewhere  in  the  field  of  distribution  too  many 
business  men  have  adhered  to  the  rule  of  thumb. 

THE  RULE  OF  THUMB  IN  BUSINESS 

They  guess  at  the  most  effective  sales  ideas  which 
analysis  of  their  product  discloses,  guess  at  the 
most  forceful  forms  of  expressing  these,  and  guess 
at  the  most  efficient  agencies  and  mediums  for 
transmitting  them  to  prospective  purchasers. 
They  spend  in  the  aggregate  millions  of  dollars 
every  year  on  selling  campaigns  based  on  a  series 
of  approximations  or  opinions  arrived  at  in  this 
loose  fashion. 

The  need  of  a  searching  study  of  all  the  activities 
of  distribution  by  government  and  private  agen- 
cies, working  together  on  a  coordinated  plan,  is 
emphasized  by  the  appalling  waste  of  money,  effort 
and  merchandise  due  to  this  general  lack  of  stand- 
ardization in  the  materials  of  demand  creation  as 
well  as  all  the  other  factors  bearing  on  the  efficiency 
of  our  marketing  system.  I  believe  that  the 
federal  government  should  undertake  a  systematic 
inquiry  into  the  activities  of  business,  in  coopera- 
tion with  the  private  agencies,  trade  associations 
and  universities  already  engaged  in  the  work,  with 

16 


NATURE  OF  BUSINESS  ACTIVITIES 

the  idea  of  collecting,  classifying  and  standardizing 
all  available  information,  and  should  establish  some 
permanent  agency  for  disseminating  this  knowledge 
among  the  business  men  of  the  country^ 

But  to  return  to  our  classification.  (After  he  has 
gathered  and  tested  his  materials  of  demand  crea- 
tion, the  business  man's  next  problem  is  to  deter- 
mine how  he  can  transmit  these  ideas  about  his 
goods  to  the  minds  of  possible  consumers  so  directly 
and  accurately  that  they  will  adopt  his  view  of  the 
product  and  forthwith  become  purchasers.  For 
this  work  of  communication,  he  finds  that  three 
important  agencies  have  been  developed  —  the 
middleman,  the  direct  sales  force,  and  advertising,  -*~ 
both  direct  and  general.  He  must  decide  which  of 
the  three  will  best  perform  the  work  of  demand  ! 
creation  without  interfering  with  other  necessary 
activities  of  production  and  distribution  —  those 
of  physical  supply  for  instance  —  or  whether  two 
or  more  can  be  combined  advantageously  or  used 
independently  in  different  geographic  or  social  or 
economic  sections  of  the  selling  fieloV.J 

[This  is  a  vital  problem  of  the  proSucer,  and  these 
are  some  of  the  questions  he  must  ask :  Shall  I  sell 
direct  or  through  the  trade  ?  And  if  my  goods 
move  to  the  consumer  through  the  recognized 
channels,  shall  I  depend  on  the  successive  middle- 

1  I  have  advocated  this  idea  in  the  editorial  pages  of  System,  at 
various  times  for  several  years. 

17 


MARKET  DISTRIBUTION 

men  to  do  all  or  any  part  of  the  work  of  demand 
creation  ?  Or  can  I  take  on  the  entire  burden  of 
advertising  and  selling  without  prohibitive  increase 
of  expense,  and  leave  to  the  wholesaler  and  retailer 
only  the  function  of  supply  —  of  stocking  my 
products  and  handing  them  out  to  the  consumer 
when  they  are  called  for •?( 

\  Current  merchandising  practice  embraces  the 
entire  range  of  possible  procedure,  from  absolute 
dependence  on  the  middleman  for  all  the  work  of 
demand  creation,  through  every  degree  of  coopera- 
tion in  selling,  to  complete  assumption  by  the 
manufacturer  of  the  task  of  developing  and  per- 
petuating a  market  for  his  goods.  A  great  number 
of  branded  and  nationally  advertised  food  products 
illustrate  this  last  stage.  Trade-marked  and  adver- 
tised lines  of  clothing,  tools,  household  appliances 
and  the  like  occupy  the  intermediate  positions 
marked  by  cooperative  selling.  And  thousands 
of  commodities  prepared  by  concerns  which  limit 
their  activities  to  production  alone,  represent  the 
first  extreme  of  marketing  dependence. 

The  evolution  of  what  might  be  called  the 
orthodox  system  of  distribution  is  considered  at 
some  length  in  the  following  pages.  It  is  needless, 
therefore,  to  anticipate  the  analysis  or  the  conclu- 
sions which  the  reader  will  encounter  there  or  to 
enlarge  upon  what  some  think  an  apparent  ten- 
dency to  eliminate  the  middleman  not  only  in 

18 


NATURE  OF  BUSINESS  ACTIVITIES 

demand  creation  but  in  the  physical  supply  of 
commodities. 

SHORTENING  THE  CYCLE  OF  DISTRIBUTION 

This  drift  towards  a  shortened  cycle  of  distribu- 
tion by  all  the  agencies  involved  is  one  of  the  most 
interesting  developments  in  modern  business. 
Starting  with  the  manufacturer's  assumption  of 
various  functions  performed  by  the  middleman,  it 
has  brought  about  a  counter  movement  with  a  like 
purpose  among  both  wholesalers  and  retailers. 
Many  manufacturers  of  shoes,  clothing,  and  silver- 
ware (to  mention  only  the  most  typical  lines) 
virtually  ignore  the  wholesaler,  selling  and  shipping 
direct  to  the  retailer.  Many  others  have  cut  out 
all  middlemen  and  deal  with  the  consumer  in 
person,  either  by  the  mail-order  route,  through 
exclusive  stores  or  through  special  salesmen.^ 

?To  compensate  for  this  loss  in  volume,  the  whole- 
saler has  developed  his  own  "  house  brands  "  and 
reduced  the  chain  by  one  member,  practically 
turning  manufacturer  himself.]  Even  here  there  is 
divergence  in  method.  Of  two  great  merchandis- 
ing houses  which  are  my  neighbors  in  Chicago,  one 
has  adopted  the  policy  of  controlling  important 
sources  of  supply  through  actual  ownership,  while 
the  other  prefers  to  identify  many  small  producers 
with  its  organization,  furnishing  them  with  work- 
ing capital,  patterns  or  style  suggestions  and  a 

19 


MARKET  DISTRIBUTION 

market  for  their  total  output,  thus  allowing  them 
to  concentrate  on  production  problems  alone.  The 
large  retailer,  too,  by  developing  exclusive  sources 
for  his  principal  lines  has  short-cut  distribution  no 
less  effectually  than  has  the  manufacturer  who 
sells  direct  to  the  consumer:! 

( Analyzing  the  results  of  these  antagonistic  move- 
ments to  simplify  the  production-distribution 
equation,  the  manufacturer  seeking  a  market  for 
his  product  must  ask  himself  whether  the  apparent 
elimination  of  the  middleman  is  as  real  and  as  con- 
clusive as  it  seems  at  first  sight.  He  must  consider 
the  probability  that  his  elimination  of  the  middle- 
man in  his  particular  business  will  not  eliminate 
him  from  the  general  marketing  scheme  in  his 
trade.  And  finally  he  must  determine  whether  in 
his  individual  case  the  wisest  course  is  to  divide  the 
functions  of  distribution  with  cooperating  middle- 
men or  to  divide  the  market  with  as  many  extra 
competitors  already  in  touch  with  the  trade.  _i 

For  an  endless  variety  of  non-staple  articles  — 
"  specialties  "  in  the  language  of  the  market  place 
—  it  remains  true  that  anything  like  maximum 
sales  is  impossible  unless  consumer  advertising  or  a 
direct  sales  force  is  employed  in  demand  creation. 

If  the  product  be  simply  a  bettered  staple,  re- 
taining its  familiar  characteristics  and  depending 
on  refinement  of  design  or  finish  to  recommend  it, 
no  particular  urging  is  necessary  to  stimulate  the 

20 


NATURE  OF  BUSINESS  ACTIVITIES 

middleman's  interest  and  secure  his  order.  Any 
advance  in  price  or  decrease  in  quality  operates 
against  this  easy  acceptance,  of  course,  even  when 
specialization  gives  the  product  an  added  or  unique 
utility. 

Where  the  character,  quality,  or  use  of  the 
article,  however,  is  not  evident  at  a  glance  but 
requires  demonstration  or  the  development  of  ideas 
unfamiliar  to  the  trade  and  the  consumer,  the  work 
of  transmitting  these  selling  points  through  two  or 
more  middlemen  is  attended  by  difficulties.  The 
chief  difficulty  arises  because  the  differentiated 
product  requires  individual  handling  at  every  stage 
of  demand  creation,  while  conditions  are  against 
its  chances  of  this  special  attention.  When  it  is 
also  competing  for  the  middleman's  interest  with 
private  brands  or  with  articles  of  lesser  quality 
which  are  more  easily  sold  or  allow  the  middleman 
a  greater  unit  profit  without  jeopardizing  sales,  its 
chances  of  demand  creation  at  first  hand  are  even 
further  diminished. 

THE  PRACTICAL  PROBLEM  IN  DISTRIBUTION 

Whether  advertising  by  the  producer  and  the 
direct  sales  force  usurped  the  middleman's  function 
of  demand  creation  or  were  evolved  to  perform  a 
neglected  task  is  of  no  immediate  moment.  All 
three  agencies  exist  and  are  likely  to  continue 
active  in  distribution  as  long  as  individualism  holds 

21 


MARKET  DISTRIBUTION 

its  place  in  affairs.  To  the  business  man  —  in  a 
very  real  measure  to  society  as  well  —  the  impor- 
tant thing  is  to  determine  when  and  how  they  can 
be  combined  or  can  be  used  independently  to  create 
maximum  demand  for  a  product  with  a  minimum 
outlay  of  effort  and  expense. 

This  consideration  of  the  "  when  "  and  "  how  " 
of  utilization  brings  forward  the  third  and  final 
group  of  operating  activities  under  demand  crea- 
tion —  those  having  to  do  with  analysis  of  the 
market  from  the  view-point  of  economic  and  social 
strata  as  well  as  of  geographical  areas,  the  fixing  of 
prices  and  the  choice  or  combination  of  agencies. 
The  guiding  policies  of  this  group  and  their  rela- 
tions with  one  another  and  with  the  other  activities 
of  distribution  will  be  found  outlined  in  the  subse- 
quent chapters  of  this  book. 

Not  to  weary  the  reader  with  a  fresh  application 
of  a  familiar  analysis,  it  will  be  enough  to  say  here 
that  the  second  grand  division  of  the  activities  of 
distribution  —  that  concerned  with  the  physical 
supply  of  commodities  —  breaks  up  into  groups 
analogous  to  those  already  indicated  under  demand 
creation.  Classified  according  to  purpose,  the  first 
grouping  disclosed  is  exactly  the  same:  plant 
activities  and  operating  activities. 

The  parallel  continues  through  plant  activities; 
these  have  to  do  with  location,  construction  or 
equipment.  Under  operating  activities  the  com- 

22 


NATURE  OF  BUSINESS  ACTIVITIES 

modities  to  be  distributed  correspond  to  materials 
in  the  other  groups,  while  the  agencies  are  either 
the  fractional  middlemen  of  the  orthodox  system, 
a  direct  supply  organization,  like  branch  houses  or 
an  exclusive  delivery  force,  as  in  city  and  subur- 
ban territories,  or  functional  middlemen  like  the 
express,  warehousing  and  transportation  companies 
which  offer  direct  access  to  the  consumer.  The 
establishment  of  a  domestic  parcel  post,  equipped 
to  handle  twenty -pound  packages  and  to  make  col- 
lections on  delivery,  has  provided  another  cheap, 
popular  and  universal  vehicle  for  delivering  mer- 
chandise to  the  final  user.  Organization,  in  its 
turn,  is  concerned  with  analysis  of  the  market  or 
territory  to  be  served  and  selection  or  combination 
of  the  agencies  which  will  supply  the  aroused 
demand  at  minimum  expense  and  with  the  least 
possible  leakage  of  this  demand. , 

THE  DIVISION  OF  LABOR  IN  MANAGEMENT 

So  much  for  the  recognized  activities  of  produc- 
tion and  distribution.  There  remains  a  third 
basic  division  already  suggested  as  the  facilitating 
activities  of  business  —  financing,  credits  and 
collections,  purchasing,  employment,  accounting 
and  auditing,  records  and  statistics,  office  manage- 
ment. As  the  division  of  labor  was  carried  further 
and  further  in  the  activities  of  production  and  of 
distribution,  the  control  of  these  activities  became 

23 


MARKET  DISTRIBUTION 

both  complex  and  difficult.  The  pieces  on  the 
chess  board  of  business  were  multiplied  and  the 
final  result  came  to  depend  more  and  more  on 
the  way  in  which  each  piece  was  manipulated  to 
forward  the  general  plan.  The  necessity  of  co- 
ordinating and  handling  the  countless  resulting 
details  compelled  the  management  to  deal  with 
paper  representations  of  the  materials,  motions 
and  relations  involved  instead  of  directly  with  the 
things  themselves. 

The  possibility  of  thus  keeping  in  touch  with  the 
significant  activities  of  a  business  had  the  further 
effect  of  greatly  enlarging  the  size  of  organizations 
and  the  scale  of  operations.1  And  finally,  the 
extent  and  complex  character  of  business  as  well  as 
the  distance  of  the  controlling  executives  from  the 
things  controlled,  put  such  a  premium  on  efficiency 
in  all  these  facilitating  activities,  that  the  principle 
of  the  division  of  labor  was  extended.  The  classi- 
fication and  organization  of  the  functions  of  ad- 
ministration followed  as  a  matter  of  course. 

The  introduction  of  machinery  for  compiling  and 
assorting  statistics,  for  writing  reports  and  tabulat- 
ing information,  for  checking  mental  calculations, 
is  indicative  of  the  great  increase  in  the  volume  of 
administrative  activities  and  the  number  of 
motions  into  which  these  operations  have  been 
broken  up.  By  reason  of  their  number,  scope  and 

1  See  Alfred  Marshall:  Principles  of  Economics,  IV,  xi,  278-289. 
24 


NATURE  OF  BUSINESS  ACTIVITIES 

importance,  they  have  forced  recognition  as  a 
separate  group  of  activities  apart  from  but  coordi- 
nate with  those  of  production  and  distribution. 
The  need,  therefore,  is  imperative  for  an  organized 
method  of  bringing  them  all  together,  of  estab- 
lishing their  relations  and  of  holding  them  at  such 
distance  from  the  executive  that  no  one  of  them 
shall  exercise  undue  influence  on  his  decisions  — 
in  short  a  method  of  keeping  them  in  balance  with 
all  the  other  activities  of  the  business. 

How  A  CLASSIFICATION  PLACES  ACTIVITIES 

The  general  tardiness  in  discovering  a  common 
purpose  in  their  functions  is  probably  due  to  be- 
lated analysis.  In  the  small  or  medium-sized 
business  the  usual  practice  is  to  make  the  produc- 
tion and  sales  organizations  responsible  for  such 
administrative  activities  as  are  apparently  related, 
or  to  retain  them  under  the  immediate  eye  of  the 
executive.  Only  the  larger  concerns,  facing  the 
urgent  problem  of  keeping  their  operations  effec- 
tive and  under  control,  have  set  them  apart  as  a 
group  of  auxiliary  functions  directly  contributing 
to  but  impossible  to  classify  as  activities  of  either 
production  or  distribution. 

Confronted  with  this  multiplicity  of  motions  and 
operations,  the  manager,  as  well  as  the  student  of 
business,  finds  that  some  scheme  of  classification  is 
necessary  to  make  their  relations  clear.  When  we 

25 


MARKET  DISTRIBUTION 

inquire  their  purpose,  therefore,  their  common 
character  as  the  facilitating  activities  of  business 
comes  out  immediately.  Pursuing  the  analysis 
along  the  lines  already  made  familiar,  we  discover 
that  they  break  up  first  into  two  groups  concerned 
with  plant  and  operating  functions.  As  before, 
the  first  group  sub-divides,  according  as  the  func- 
tions relate  to  location,  construction  or  equipment. 
When  we  take  up  the  operating  activities,  we  find 
that  they  also  split  up  in  the  accustomed  way  and 
range  themselves  under  materials,  labor  and  or- 
ganization.1 But  there  is  an  important  difference; 
the  materials  of  administration  or  facilitation  - 
that  to  which  motion  is  applied  —  are  the  paper 
representations  of  the  functions  which  are  per- 
formed. These  paper  representations  are  either 
causal  —  purchase  or  employment  requisitions,  or 
shipping  requisitions;  or  resultant  —  outgoing  in- 

1  How  this  classification  squares  itself  with  current  business  prac- 
tice may  be  easily  tested.  Purchase  requisitions  refer  to  plant  and 
equipment  or  to  materials  and  supplies,  while  employment  requisitions 
have  to  do  with  labor.  They  originate  in  either  the  manufacturing, 
the  distributing  or  the  facilitating  activities  of  the  business.  The  first 
two  groups  of  functions  center  in  the  purchasing  agent,  and  labor 
brings  us  back  to  the  employment  bureau  or  official  of  the  average 
concern.  Besides  the  factory  or  finished  stock  departments,  the 
shipping  requisitions  directly  involve  the  credit  man,  who  must  pass 
on  the  order  before  it  is  honored  by  either.  On  the  resultant  side,  the 
outgoing  invoices  are  the  affair  of  the  collections  department;  the 
vouchers  represent  the  responsibilities  of  the  financial  end  of  the  busi- 
ness, and  the  house  records  are  the  concern  of  the  accounting,  auditing 
and  statistical  departments. 

26 


NATURE  OF  BUSINESS  ACTIVITIES 

voices,  vouchers,  and  general  and  department 
records. 

Of  the  two  remaining  groups  of  operating  activi- 
ties, labor  presents  problems  much  like  those 
encountered  in  determining  the  labor  policies  of 
production.  If  anything,  the  selection,  training, 
paying,  and  handling  of  an  office  force  is  the  more 
complex  task.  Finally,  the  problems  of  organiza- 
tion parallel  those  brought  forward  in  the  organi- 
zation of  the  activities  of  distribution. 

Within  the  various  departments,  functions  are 
generally  well  understood;  nevertheless  it  remains 
for  the  manager  to  determine  how  his  departments 
shall  divide  or  concentrate  these  functions,  and  to 
establish  policies  which  will  insure  all-round 
cooperation.  The  human  factor  is  vitally  impor- 
tant, of  course.  The  character  and  scale  of  the 
business,  too,  help  to  define  the  scope  and  functions 
of  each  department.  As  the  organization  increases 
in  size,  certain  functions  take  on  added  importance 
both  because  of  the  volume  involved  and  because 
there  is  less  of  personal  contact  between  depart- 
ment heads.  Hence  it  is  that  many  concerns 
have  transferred  the  handling  of  these  from  pro- 
duction or  distribution  to  an  administration  group 
of  activities. 

Is  there  a  practical  reason  for  recognizing  a  new 
classification  for  these  functions  and  for  bringing 
them  together  on  their  common  plane  of  facilitat- 

27 


MARKET  DISTRIBUTION 

ing  purpose  ?  Does  it  serve  any  useful  end  ?  To 
my  mind,  it  does.  The  head  of  every  business,  in 
determining  and  maintaining  consistent  policies 
towards  all  its  activities,  finds  himself  controlled 
as  we  have  already  seen,  by  the  principle  of  inter- 
dependence and  the  principle  of  balance.  The 
typical  business  exists,  however,  because  the  man 
behind  it  is  a  specialist.  He  has  capitalized  his 
buyer's  instinct  for  values,  his  salesman's  tact  and 
enthusiasm,  or  his  patience  and  resources  as  shop 
organizer.  He  has  built  on  this  special  ability,  and 
unless  he  has  some  systematic  method  of  analysis 
and  some  broad  scheme  of  classification  to  correct 
his  leanings,  he  is  apt  to  depend  too  much  on  his 
specialty  and  neglect  other  necessary  functions. 

THE  STRATEGIC  POSITION  OF  THE  MANAGER 

The  strategic  position  for  the  manager,  therefore, 
is  one  free  from  the  routine  of  any  department  yet 
hi  touch  with  the  significant  details  of  all.  From 
no  other  view-point  can  he  secure  a  clear  vision  of 
his  business,  protect  himself  from  department  bias 
and  overcome  a  tendency  to  lay  too  much  stress  on 
the  activities  which  are  most  familiar  or  most  in- 
teresting to  him. 

I  do  not  mean  that  the  head  of  a  business  must 
withdraw  from  all  contact  with  details  in  order  to 
keep  his  perspective.  In  innumerable  small  busi- 
nesses, the  owner-manager  is  of  necessity  the  sales 

28 


NATURE  OF  BUSINESS  ACTIVITIES 

manager  or  factory  superintendent,  the  advertising 
manager  or  the  purchasing  agent  —  to  say  nothing 
of  his  handling  of  finance  and  perhaps  of  credits 
and  collections.  It  is  to  just  such  a  man  indeed 
that  the  classification  of  business  activities  here 
proposed  should  be  of  greatest  value,  since  it  em- 
phasizes as  of  equal  importance  with  production 
and  distribution  those  facilitating  activities  which 
are  frequently  slighted  because  the  consequences 
of  neglect  are  slower  to  appear. 

In  the  large  business,  it  is  true,  the  management 
deals  with  details,  but  they  are  symptomatic 
details.  The  popular  conception  of  the  head  of  a 
big  enterprise  is  of  a  man  engaged  in  transactions 
involving  millions  of  dollars;  yet  in  a  business  of 
great  size  it  may  be  a  mere  matter  of  routine  to  put 
a  note  for  a  hundred  thousand  dollars  in  the  bank, 
while  a  complaint  involving  forty  cents  may  be 
a  significant  detail,  which  the  head  himself  must 
handle  because  it  involves  delicate  relations  be- 
tween departments  or  still  more  delicate  relations 
between  the  business  and  its  public.  The  big  busi- 
ness man,  therefore,  is  constantly  handling  details 
—  not  routine  trifles  but  symptomatic  details. 

Acceptance  and  use  of  this  classification  does  not 
require  the  formal  partition  of  an  organization  into 
production,  distribution  and  administration  divi- 
sions —  though  this  plan  of  organization  is  now 
successfully  employed  by  leading  American  con- 

29 


MARKET  DISTRIBUTION 

cerns.  The  purchasing  agent  in  any  given  case 
may  remain  a  factory  official  or  the  experimental 
department  may  continue  to  work  under  the  sales 
manager.  The  important  thing  is  that  the  mana- 
ger himself  should  recognize  buying  and  providing 
for  the  future  needs  of  customers  as  activities  which 
interest  not  the  factory  and  the  sales  department 
alone  but  the  entire  organization.  Viewed  thus, 
their  oversight  and  direction  are  as  essentially  the 
manager's  concern  as  supervision  of  making  and 
selling  operations. 

By  placing  them  as  facilitating  activities  related 
to  the  whole  business,  on  a  par  with  production  and 
distribution,  the  scheme  of  classification  gives  the 
manager  the  correct  focus  and  a  rational  approach 
to  the  problems  arising  from  them.  His  own  tra- 
ditional function  of  finance,  for  instance,  may  bulk 
so  large  in  any  survey  he  takes  of  the  business  that 
it  entirely  obscures  the  damage  a  narrow  financial 
outlook  does  to  sales  and  production.  The  proper 
placing  of  finance  as  a  facilitating  function,  of  no 
greater  importance  perhaps  than  many  others, 
might  establish  the  missing  balance  which  is 
hampering  the  whole  enterprise. 

The  first  service  of  any  good  classification,  indeed, 
is  to  allow  the  man  using  it  to  back  away  from  the 
things  with  which  he  is  immediately  occupied  and 
to  see  all  the  activities  involved  in  their  true  rela- 
tions and  proportions.  This  strategic  position, 

so 


NATURE  OF  BUSINESS  ACTIVITIES 

aloof  from  details,  or  at  least  recognizing  them  as 
details,  leaves  him  free  to  view  the  broader  prob- 
lems which  changing  conditions  and  increasing 
social  control  of  private  enterprises  are  proposing 
for  his  solution. 

SOCIETY  CHALLENGING  ITS  RETURN  FROM  BUSINESS 

Unless  he  is  blind  or  very  obstinate,  the  business 
man  must  realize  that  he  is  no  longer  autocrat  over 
his  undertaking,  able  to  base  his  policies  on  whim 
or  personal  prejudice  or  an  entirely  selfish  concep- 
tion of  business.  Society  is  asking  of  its  college 
men  what  return  in  community  service  they  are 
making  for  the  exceptional  training  advantages 
accorded  them.  And  public  opinion  is  beginning 
to  put  the  same  query  to  business  men  in  sharper 
and  more  specific  fashion. 

"  Here,"  society  says,  "  you  have  been  given 
opportunities  and  advantages  in  your  businesses 
such  as  no  body  of  men  at  any  other  stage  of  the 
world's  progress  ever  enjoyed.  You  have  raw 
materials,  fuel,  buildings  that  are  cheap,  abundant 
and  of  excellent  quality.  You  have  machinery  of 
surpassing  ingenuity  and  capacity,  able  to  perform 
almost  any  task  you  set  for  it  at  a  cost  amazingly 
slight.  You  have  labor  of  exceptional  intelligence 
to  direct  and  supplement  the  functions  of  these 
machines.  You  have  a  comprehensive  transporta- 
tion system  which  makes  a  great  continent  —  the 

31 


MARKET  DISTRIBUTION 

whole  world  indeed  —  a  market  for  your  product 
and  a  source  for  your  supplies  of  labor,  mate- 
rials and  equipment.  Almost  every  necessary 
element  and  favorable  condition  you  could  ask  are 
provided  for  you.  You  have  only  to  supply  the 
organizing  ability  which  will  pick  out  the  right 
product  to  make  or  sell  and  choose  the  right  mate- 
rials, the  right  equipment,  the  right  location,  the 
right  method  of  marketing.  Over  against  your 
organizing  ability  and  capital,  I  set  these  contribu- 
tions of  mine.  What  besides  the  market  minimum 
of  value  and  service  at  the  price  are  you  going  to 
supply  as  my  profit  on  my  investment  of  commun- 
ity machinery  and  opportunity  ?  " 

Without  formulating  its  approach  to  the  prob- 
lem, society  has  been  applying  more  and  more 
inclusively  the  basic  test  of  purpose  to  the  activities 
of  business  men.  It  has  come  to  feel  that  so  large 
a  margin  has  been  allowed  that  it  permits  them  to 
practice  many  of  the  mere  arts  of  commerce.  It 
has  sensed  the  existence  of  useless  motions,  ob- 
served the  needless  duplication  of  essential  func- 
tions, and  in  some  cases  —  the  establishment  of  a 
parcel  post  to  carry  package  freight  in  competition 
with  the  express  companies,  for  example,  —  it  has 
sought  a  drastic  short-cut  to  a  fairer  balance 
between  service  and  cost. 

In  other  instances  it  has  adopted  milder  meas- 
ures of  regulation  and  adjustment,  as  in  the  work 

32 


NATURE  OF  BUSINESS  ACTIVITIES 

of  the  Interstate  Commerce  Commission,  the  pro- 
jected functions  of  the  Federal  Trade  Commission, 
and  the  activities  of  state  and  local  boards  for  the 
supervision  of  trades  and  industries. 

THE  EXTERNAL  PROBLEMS  OF  BUSINESS 

From  this  attitude  of  society,  crystallizing  after 
long  agitation  into  definite  policies  of  regulation, 
arise  what  may  be  termed  the  external  problems  of 
business.  If  I  were  to  chart  the  broad  relations  of 
any  individual  business,  I  would  represent  its 
internal  and  external  activities  as  two  circles 
impinging  upon  one  another,  with  the  management 
on  the  alert  at  the  point  of  contact.  The  internal 
problems  would  arise  out  of  the  relations  of  the 
activities  of  production  and  distribution  and  what 
we  have  been  calling  administration.  The  external 
problems  would  have  to  do  first  with  the  special 
public  the  business  is  concerned  with  —  its  cus- 
tomers and  prospects,  its  competitors,  and  the 
general  body  of  labor  from  which  it  draws  its 
workers  —  sales,  executive,  clerical,  or  factory. 
And  outside  this  circle,  I  would  trace  another  much 
larger  to  indicate  the  relations  of  the  business  with 
the  general  public. 

In  dealing  with  both  these  social  groups,  how- 
ever, the  manager  is  not  so  much  concerned  with 
the  immediate  activities  observed,  as  with  the 
actuating  motives  of  which  the  actions  are  the 

33 


MARKET  DISTRIBUTION 

expression.  When  he  begins  studying  the  public 
and  its  relations  with  his  own  undertaking,  he  finds 
that  he  must  take  account  first  of  the  motives 
likely  to  influence  the  various  social  groups  or 
strata  to  action  favorable  or  unfavorable  to  his 
purposes.  The  comfort  his  employees  take  from 
their  pleasant,  well-lighted  and  well-ventilated 
work  rooms,  for  instance,  is  likely  to  reflect  itself 
in  a  community  esteem  which  will  react  on  local 
sales  and  on  the  attitude  of  that  section  of  the 
public  from  which  he  draws  his  workers. 

In  determining  the  policies  which  shall  govern 
his  relations  with  the  general  public,  the  business 
man  will  recognize  three  modifying  influences  —  or 
three  phases  of  the  same  powerful  influence  —  to 
which  he  must  accommodate  his  activities.  Of 
these,  the  hardest  to  understand  yet  the  real  force 
to  reckon  with  is  public  opinion  —  the  reaction  of 
contemporary  thought  or  emotion  or  ethical  sense 
upon  the  activities  of  business  and  the  conditions 
under  which  they  are  carried  on. 

The  law  is  the  second  of  these  influences,  but  law 
is  simply  the  crystallization  of  public  opinion  into 
a  definite  enactment;  while  the  government,  the 
third  influence,  is  only  an  administrative  agency 
for  putting  this  formulated  public  opinion  into 
effect.  The  wise  man  is  the  man  who  keeps 
abreast  of  public  opinion,  who  detects  the  chang- 
ing view-point  of  the  country  or  the  community 

34 


NATURE  OF  BUSINESS  ACTIVITIES 

and  so  modifies  his  individual  business  practice 
that  he  escapes  entanglement  later  with  the  opera- 
tions of  the  law  or  the  machinery  of  the  govern- 
ment. The  average  business  man,  submerged  in 
the  activities  of  his  undertaking,  has  at  times  either 
not  caught  society's  drift  or  has  not  realized  its 
vital  bearing  on  his  business.  Not  until  the  law 
formulating  this  public  opinion  was  enacted  or 
about  to  be  enacted  has  he  awakened  to  its  pur- 
port, and  then  discovered  that  the  people,  through 
various  civic  organizations,  had  been  studying  the 
underlying  question  much  longer  than  he  had 
suspected. 

Public  opinion  is  the  fundamental  force,  yet  even 
now  business  men  are  more  intent  apparently  upon 
the  interpretation  of  the  law  and  the  attitude  of 
the  government  than  upon  developments  in  the 
public  mind. 

Watching  all  this  legislative,  judicial  and  ad- 
ministrative machinery  in  motion,  the  owner  or 
manager  of  a  business  may  too  readily  conclude 
that  his  important  external  problems  are  chiefly 
concerned  with  it,  not  with  smoking-car  debates, 
the  gossip  of  a  switch  shanty  or  the  discussions  of  a 
woman's  club.  But  it  is  this  talk  and  the  convic- 
tions that  emerge  from  it  that  are  the  things  he 
must  consider.  The  passage  of  the  Interstate 
Commerce  Act  in  1887,  for  instance,  was  the  first 
break  in  a  long  continued  policy  of  federal  en- 

35 


MARKET  DISTRIBUTION 

couragement  of  private  enterprise,  particularly 
evident  in  the  subsidies  and  land  grants  to  railroads 
and  the  protective  tariff  for  the  fostering  of  indus- 
tries. The  Sherman  Anti-Trust  Law  followed  in 
1890,  but  a  dozen  years  were  to  elapse  before  court 
decisions  defining  the  jurisdiction  of  the  Interstate 
Commerce  Commission  and  the  inclusive  scope  of 
the  Sherman  law  emphasized  the  principle  of  con- 
trol underlying  both  enactments. 

THE  DOMINANT  INFLUENCE  OF  PUBLIC  OPINION 

No  better  illustration  could  be  cited  of  the  power 
of  public  opinion  to  modify  the  established  law 
as  interpreted  by  the  courts  and  administered  by 
the  government.  The  Commerce  act  as  adopted 
expressed  the  current  feeling  that  discriminations 
in  railroad  rates  for  or  against  individual  shippers 
or  communities  constituted  a  menace  to  the  busi- 
ness of  the  country.  The  Sherman  law  was  quite 
as  definite  in  its  attack  on  contracts  and  combina- 
tions in  restraint  of  trade.  But  neither  effected 
any  radical  change  in  the  practices  they  were 
aimed  at  until  the  courts  and  the  national  govern- 
ment began  to  feel  the  pressure  of  an  aroused  public 
sentiment  a  full  decade  later.  Had  the  railroads 
taken  cognizance  of  this  public  opinion  and  re- 
shaped their  rate  and  traffic  policies  in  accord  with 
it,  they  might  have  been  spared  some  of  their 
troubles  in  the  last  seven  lean  years. 

36 


NATURE  OF  BUSINESS  ACTIVITIES 

This  pressure  has  continued  and  grown  stronger. 
Witness  among  other  effects,  the  decisions  of  the 
United  States  Supreme  Court  dissolving  the  North- 
ern Securities  Company  and  the  oil  and  tobacco 
combinations,  cancelling  the  exclusive  anthracitic 
coal  contracts,  affirming  the  right  of  the  Commerce 
Commission  to  fix  general  or  zone  rates  on  its  own 
initiative,  and  declaring  the  constitutionality  of 
the  long  and  short  haul  clause  of  the  Commerce 
act. 

On  the  administrative  side,  again,  there  is  the 
defensive  suit  pending  against  the  International 
Harvester  Company,  which  hinges  on  the  ability 
of  that  concern  to  throttle  competition  rather  than 
on  any  actual  efforts  to  that  end.  And  finally  the 
legislative  program  of  the  last  Congress  included 
the  Clayton  law  defining  unfair  trading  practices, 
and  the  act  establishing  the  Federal  Trade  Com- 
mission —  the  latter  body  standing  towards  busi- 
ness in  general  in  much  the  same  relations  as  those 
which  the  Interstate  Commerce  Commission  main- 
tains towards  the  railroads  and  the  shippers  of  the 
country. 

This  increasing  concern  of  the  federal  and  the 
state  governments  with  business  practices  opens 
up  a  new  set  of  external  problems  to  the  average 
manager.  In  the  past,  as  a  rule,  he  has  left  the 
threshing  out  of  proposed  restrictive  legislation  or 
administrative  orders  to  the  larger  commercial  and 

37 


MARKET  DISTRIBUTION 

industrial  units,  on  the  theory  that  their  interests 
in  the  matter  were  so  great  that  they  could  be 
trusted  to  represent  his  interests  also,  or  for  the 
more  specific  reason  that  usually  he  did  not  realize 
the  importance  of  the  question  until  it  was  brought 
to  his  attention  by  the  action  of  these  larger  con- 
cerns. 

THE  ATTITUDE  OF  THE  STATE  TOWARDS  BUSINESS 

In  the  future,  however,  the  attitudes  of  the 
national  and  state  governments  towards  business 
are  bound  to  have  an  increasing  influence  on  the 
conduct  of  every  factory  and  store.  No  longer 
can  the  head  of  a  small  business  leave  the  adjust- 
ment of  his  relations  with  the  law,  the  government 
and  public  opinion  to  the  grace  of  his  big  neighbors 
or  competitors  or  the  zeal  of  the  men  who  run  his 
trade  association.  He  must  cooperate  with  his 
trade  rivals  and  associates  in  conveying  to  the 
public  in  general  and  to  the  men  who  make  and 
execute  the  laws  an  understanding  of  the  activities, 
the  relations  and  the  necessities  of  business.  Other- 
wise ill-conceived  or  doctrinaire  legislation  will 
hamper  the  operations  of  trade  and  industry  to 
such  a  degree  that  the  burden  of  added  expense, 
under  the  law  of  competitive  business,  will  have  to 
be  passed  along  to  the  consumer. 

Regulation  must  be  intelligent;  it  must  be  at 
the  hands  of  men  who  know  the  technique  of 

38 


NATURE  OF  BUSINESS  ACTIVITIES 

business,  who  can  distinguish  between  essential  and 
non-essential  activities,  and  can  further  the  first 
while  they  are  eliminating  the  latter.  In  self- 
defense,  therefore,  as  well  as  for  the  sake  of  prog- 
ress, every  business  man  must  begin  to  consider 
the  shaping  of  legislation  and  the  choice  of  admin- 
istrative officials  as  serious  external  problems  of  his 
business.  Public  opinion  needs  to  be  informed 
about  business,  its  problems,  and  its  complexities. 
It  is  not,  however,  for  the  sole  purpose  of  educating 
the  public  and  its  law-makers  that  the  business 
man  should  interest  himself  in  public  affairs  and 
opinion.  The  business  man  needs  more  than  ever 
today  to  gauge  the  depth  and  directions  of  social 
currents. 

Summed  up,  then,  the  business  man  has  two 
distinct  groups  of  problems  to  consider.  In 
approaching  and  solving  them  he  must  keep  always 
in  mind  the  universal  application  of  the  principles 
of  balance  and  of  interdependence.  He  must 
remember  that  no  question  can  be  dealt  with  in  the 
light  of  departmental  requirements  alone,  or  even 
as  one  affecting  only  production  or  distribution  or 
administration  policies.  Instead,  it  must  be 
handled  as  a  matter  involving  many,  perhaps  all, 
of  the  other  activities  of  his  business.  But  more  is 
necessary;  he  must  not  only  perceive  these  con- 
tacts and  establish  right  relations  between  activi- 
ties within  his  organization  and  within  the  circle  of 

39 


MARKET  DISTRIBUTION 

his  special  public,  but  he  must  accommodate  his 
policies  and  his  practice  with  the  convictions,  and 
at  times  the  sentiments  of  the  general  public  as 
expressed  by  the  Law,  the  Government  and  Public 
Opinion.  In  a  word,  the  external  problems  of 
business  are  become  internal  problems  in  the  sense 
that  no  intra-organization  policy  can  safely  be 
determined  without  taking  into  account  the 
attitude  of  society  towards  the  activities  involved. 


40 


CHAPTER  II 

PROBLEMS  OF  THE  DISTRIBUTOR 

THE  business  man  is  concerned  with  the  produc- 
tion and  distribution  of  goods.  Factory  production 
he  finds  relatively  well  organized.  The  era  of  the 
rule  of  thumb  is  passing,  and  the  progressive 
business  man  can  call  upon  the  production  expert, 
technically  trained,  to  assist  him  in  solving  his 
problems  of  production.  But  the  marketing  of 
the  product  has  received  little  studious  attention. 
As  yet  there  hardly  has  been  an  attempt  even  to 
bring  together,  describe,  and  correlate  the  facts 
concerning  commercial  distribution.  Selling  is  on 
a  purely  experimental  basis. 

The  progress  that  has  been  made  in  organizing 
production  is  the  result  of  systematic  study.  For 
centuries  attention  has  been  concentrated  on  the 
problems  of  production.  Methods  of  study  that 
have  proved  fruitful  in  other  fields  have  been 
applied  to  the  problems  of  manufacture  and  a 
body  of  organized  knowledge  is  being  built  up. 

Now  the  problems  of  market  distribution  are  no 
less  worthy  of  systematic  study  than  are  the  prob- 
lems of  factory  production.  It  is  as  essential  that 
the  finished  goods  be  moved  from  the  stock  room 

41 


MARKET  DISTRIBUTION 

of  the  producer  to  the  hands  of  the  consumer,  as  it 
is  that  operations  be  performed  upon  the  raw 
material  to  produce  the  finished  goods.  And  the 
problems  of  marketing  are  even  more  complicated 
than  the  problems  of  manufacturing,  because  the 
human  factor  is  of  more  direct  importance. 

Why  has  not  systematic  study  been  given  to  the 
problems  of  distribution  ?  The  explanation  is  found 
in  a  glance  back  in  our  economic  history.  Chief 
among  the  causes  for  the  industrial  changes  leading 
to  the  establishment  of  the  factory  system  in  Eng- 
land in  the  eighteenth  century  was  the  constant 
widening  of  the  market.  It  was  a  rapidly  increas- 
ing pressure  on  the  producer  for  greater  quantities 
of  staple  articles  for  mass  consumption  that  gave 
incentive  to  the  revolution  in  the  method  of  pro- 
duction. For  a  century  thereafter  the  necessity 
of  supplying  a  continually  widening  market,  as 
means  of  transportation  steadily  improved  and  the 
population  increased  with  unprecedented  rapidity, 
made  production  the  dominant  problem .  Economic 
conditions  have  put  the  emphasis  on  production. 

Where  the  felt  need  is  greatest,  there  will  the 
organizing  ability  of  the  human  race  concentrate 
itself.  The  problems  of  production  were  sensed 
as  the  most  pressing  that  faced  society.  He  who 
improved  methods  of  manufacture  to  increase  out- 
put or  reduce  cost  reaped  a  large  reward.  Hence 
the  ablest  minds  were  drawn  toward  the  solution 

42 


THE  DISTRIBUTOR 

of  those  problems.  The  business  manager  gave 
his  best  thought  to  the  difficult  task  of  producing 
more  goods  at  lower  cost.  The  constantly  widen- 
ing market  made  selling  a  comparatively  simple 
problem. 

As  a  result  we  have  built  up  a  relatively  efficient 
organization  of  production.  While  much  remains 
to  be  done,  the  resources  of  modern  science  are 
being  utilized  to  improve  and  organize  our  agencies 
of  production.  The  development  of  producing 
capacity  has  been  tremendous.  New  processes 
have  been  and  are  being  introduced.  New  forces 
have  been  called  into  play.  Methods  are  con- 
stantly being  scrutinized  to  effect  a  more  economi- 
cal and  efficient  organization  of  production.  The 
recent  introduction  in  many  industries  of  so-called 
"  scientific  management  "  is  only  a  partial  crystal- 
lization of  long  years  of  progress. 

While  we  are  only  upon  the  threshold  of  the  pos- 
sibilities of  efficiency  in  production,  the  progress 
thus  far  made  has  outstripped  the  existing  system 
of  distribution.  If  our  producing  possibilities  are 
to  be  fully  utilized,  the  problems  of  distribution 
must  be  solved.  A  market  must  be  found  for  the 
goods  potentially  made  available.  This  means,  in 
the  main,  a  more  intensive  cultivation  of  existing 
markets.  The  unformulated  wants  of  the  individ- 
ual must  be  ascertained  and  the  possibility  of 
gratifying  them  brought  to  his  attention. 

43 


MARKET  DISTRIBUTION 

There  are  some,  to  be  sure,  who  deplore  the  in- 
creasing complexity  of  human  wants.  This  is  a 
problem  for  the  philosopher,  not  for  the  business 
man.  Our  whole  civilization  has  been  character- 
ized by  an  increasing  standard  of  living  due  to  the 
demand  on  the  part  of  the  individual  for  more 
goods  and  more  highly  differentiated  goods.  The 
business  man  finds  his  practical  task  in  searching 
out  human  wants  and  providing  the  means  of 
gratification. 

Not  only  does  the  chaotic  condition  of  distribu- 
tion act  as  a  check  upon  further  development  of 
production,  but  it  also  involves  a  tremendous  social 
waste.  The  consumer  pays  for  "  lost  motions  " 
in  distribution  as  surely  as  he  does  for  "  lost 
motions  "  in  production.  Society  can  no  more 
afford  an  ill-adjusted  system  of  distribution  than 
it  can  inefficient  and  wasteful  methods  of  produc- 
tion. The  social  cost  is  no  less  real. 

The  most  pressing  problem  of  the  business  man 
today,  therefore,  is  systematically  to  study  dis- 
tribution, as  production  is  being  studied.  In  this 
great  task  he  must  enlist  the  trained  minds  of  the 
economist  and  the  psychologist.  He  must  apply 
to  his  problems  the  methods  of  investigation  that 
have  proven  of  use  in  the  more  highly  developed 
fields  of  knowledge.  He  must  introduce  the  labor- 
atory point  of  view.  To  that  end,  an  attempt 
here  is  made  to  outline  some  of  the  problems  of 

44 


THE  DISTRIBUTOR 

commercial  distribution  from  the  point  of  view  of 
the  business  man,  to  analyze  them,  and  to  point 
out  some  methods  of  systematic  study  of  these 
problems. 

SITUATION  IN  THE  UNITED   STATES 

The  problem  presented  by  the  United  States  as 
a  consuming  market  is  a  complex  one.  Here  are 
a  hundred  million  people  distributed  over  an  area 
of  more  than  three  million  square  miles  (excluding 
Alaska).  Some  are  gathered  in  the  large  cities, 
where  millions  jostle  elbows.  Some  are  scattered 
over  great  areas  with  considerable  distances  be- 
tween them  and  their  neighbors.  Some  daily  pass 
hundreds  of  retail  stores;  some  must  ride  miles  to 
reach  the  nearest  store.  Wide  extremes  in  pur- 
chasing power  exist.  Millions  have  a  purchasing 
power  scarcely  sufficient  to  obtain  for  themselves 
the  barest  necessities  of  life.  A  few  can  satisfy  the 
most  extravagant  whims  of  the  human  imagination. 
Between  these  extremes  lie  all  degrees  of  purchasing 
power,  the  number  in  each  class  becoming  greater 
as  you  descend  in  the  scale  of  purchasing  power. 

Their  wants  are  as  varied  as  their  purchasing 
power.  Environment,  education,  social  custom, 
individual  habits,  and  all  the  variations  in  body 
and  mind  tend  to  render  human  wants  diverse.  In 
each  individual  there  are  certain  conscious  needs 
being  constantly  gratified  by  the  purchase  of  goods 

45 


MARKET  DISTRIBUTION 

produced  for  such  gratification.  Then  there  are 
the  conscious  needs  which  go  ungratified  because 
of  the  limitations  upon  purchasing  power  and  the 
existence  of  other  needs  of  greater  felt  importance. 
And  then  there  are  the  unformulated,  subcon- 
scious needs  which  fail  of  expression  because  the 
individual  is  ignorant  of  the  existence  of  goods 
which  would  gratify  them.  Twenty  years  ago,  to 
illustrate  this  last  class,  there  existed  in  the  farmer, 
far  from  a  barber  shop  and  clumsy  in  touch,  an 
unformulated  need  for  a  safety  razor.  Today,  the 
distributor  forces  upon  his  attention  the  existence 
of  such  a  device  and  the  unformulated  need  finds 
expression  in  effective  demand. 

The  accepted  system  of  distribution  was  built  up 
on  the  satisfying  of  staple  needs.  The  pressure  of 
the  market  discussed  above  made  it  unnecessary 
for  the  business  man  to  search  out  unformulated 
human  needs.  Only  in  recent  years,  when  the 
development  of  production,  potentially  outstrip- 
ping the  available  market,  has  shifted  the  emphasis 
to  distribution,  has  the  business  man  become  a 
pioneer  on  the  frontier  of  human  wants.  Today 
the  more  progressive  business  man  is  searching  out 
the  unconscious  needs  of  the  consumer,  is  pro- 
ducing the  goods  to  gratify  them,  is  bringing  to  the 
attention  of  the  consumer  the  existence  of  such 
goods,  and  in  response  to  an  expressed  demand,  is 
transporting  the  goods  to  the  consumer.  The  task 

46 


THE  DISTRIBUTOR 

is  one  of  adjustment.  The  materials  and  forces  of 
nature  must  be  bent  to  human  use. 

This  sort  of  activity  has  not  only  built  up  new 
consuming  power  in  the  market,  and  contributed 
to  the  progress  of  civilization,  but  has  given  rise  to 
new  price  policies  that  have  undermined  the  old 
organization  of  distribution  in  staple  lines.  Hence 
it  is  important  in  outlining  the  present  day  prob- 
lem of  distribution  to  give  special  attention  to  the 
more  progressive  distributor,  rather  than  to  the 
typical  distributor. 

It  is  not  alone  to  revealing  and  gratifying  unf  or- 
mulated  wants  by  the  creation  of  new  goods  that 
the  more  advanced  business  man  turns.  He  finds 
like  opportunity  in  the  difference  between  the 
market  price  that  has  come  to  be  established  for  a 
known  commodity  and  the  varying  subjective 
valuations  placed  upon  such  a  commodity  by  con- 
sumers of  differing  purchasing  power  and  of  differ- 
ing social  position  and  individual  habits. 

The  economists  tell  us  of  the  "  consumer's  sur- 
plus." Briefly,  this  is  the  difference  between  the 
market  value  for  a  commodity  and  the  subjective 
value  of  the  commodity  to  the  individual  con- 
sumer. Each  individual  sets  up  for  himself  a  ratio 
of  exchange  between  commodities  which  finds  ex- 
pression in  the  price  he  would  be  willing  to  pay  for 
a  given  commodity  rather  than  go  without  it. 
These  subjective  valuations  constitute  the  demand 

47 


MARKET  DISTRIBUTION 

side  of  the  market.  The  interplay  of  supply  and 
demand  gives  rise  in  a  competitive  market  to  a 
price  at  which  the  consumer  can  obtain  the  article. 

If  this  market  price  is  above  the  level  that  is 
fixed  by  the  subjective  ratio  of  exchange  of  the 
consumer,  he  drops  out  of  the  market,  utilizing 
his  purchasing  power  to  secure  other  commodities. 
But  if  the  market  price  is  below  that  which  the 
consumer  would  be  willing  to  pay  to  obtain  the 
commodity,  he  purchases  at  the  market  price,  and 
the  difference  between  his  subjective  ratio  of  ex- 
change and  the  objective  market  ratio  of  exchange 
constitutes  his  "  consumer's  surplus."  The  man 
of  means,  for  example,  purchasing  his  morning 
paper  for  a  cent,  would  still  purchase  if  the  price  of 
the  paper  were  fixed  at  five  cents,  at  ten  cents,  or 
possibly  more.  Somewhere  in  the  ascending  scale 
a  point  would  be  reached  at  which  even  he  would 
drop  out  of  the  market.  And  the  difference  be- 
tween this  point  and  the  market  price  of  one  cent 
represents  his  "consumer's  surplus." 

For  true  value  is  not  objective,  but  subjective. 
The  real  basis  of  exchange  is  the  extent  to  which 
the  article  will  satisfy  the  desire  of  the  purchaser. 
If  certain  possible  purchasers  would  find  more  en- 
joyment in  exchanging  more  of  their  "  consumer's 
surplus "  for  certain  specialized  forms  of  the 
particular  article  a  producer  makes,  rather  than 
spend  it  for  some  other  articles  or  services  for 

48 


THE  DISTRIBUTOR 

which  their  desire  is  not  so  intense,  he  performs  a 
real  social  service  in  supplying  them. 

The  more  able  distributors  turn,  though  usually 
unconsciously,  to  this  margin  as  the  basis  of  a 
demand  for  what  is  virtually  a  new  commodity. 
That  is,  they  differentiate  a  product  from  a  staple 
commodity  with  an  established  price  and  create 
demand  for  the  modified  product  upon  a  new  and 
higher  price  level. 

The  means  used  for  differentiation  are  numerous. 
Sometimes  slight  modifications  render  the  com- 
modity better  adapted  to  the  use  to  which  it  is  put. 
Sometimes  niceties  of  trimming  and  equipment  are 
utilized.  Sometimes  a  new  and  more  convenient 
style  of  package  is  used.  Sometimes  the  distrib- 
utor builds  up  an  atmosphere  of  good  taste  about 
the  goods,  or  a  reputation  for  uniform  quality 
which  insures  the  consumer  against  dissatisfaction. 
Sometimes  the  distributor  depends  upon  "  service  " 
or  special  conveniences  to  the  consumer. 

Always,  however,  the  aim  is  to  isolate  his  prod- 
uct from  the  stock  commodity  of  substantially 
like  nature.  And  nearly  always  the  distributor 
utilizes  trade  marks,  brands  or  trade  names  to 
identify  his  product  as  a  distinct  commodity. 

He  must  then  convey  to  those  consumers  whose 
subjective  ratio  of  exchange  would  have  led  them 
to  pay  a  higher  price  for  the  stock  commodity 
before  transferring  their  demand  to  other  goods, 

49 


MARKET  DISTRIBUTION 

knowledge  of  the  existence  of  his  differentiated  prod- 
uct at  a  higher  price  level.  By  calling  attention  to 
the  superior  qualities  or  convenience  or  constant 
reliability  of  his  differentiated  product,  he  transfers 
to  it  a  portion  of  the  demand  that  formerly  found 
expression  in  the  purchase  of  the  stock  commodity. 
The  marketing  of  hats  furnishes  a  good  illus- 
tration of  this  development.  If  derby  hats  were 
distributed  as  a  staple,  unbranded  and  at  a  single 
market  price  for  a  given  quality,  many  consumers 
would  pay  perhaps  $3.00  for  a  staple  hat,  whose 
individual  ratio  of  exchange  would  render  them 
willing  to  pay  more  than  $3.00  for  a  hat  rather  than 
go  without.  But  certain  producers  have  distin- 
guished their  hats  from  the  staple  hat  by  their 
brand.  By  calling  the  attention  of  the  consumers 
to  niceties  of  trimming  and  finish,  and  by  emphasis 
upon  design,  some  such  producers  have  built  up  a 
demand  for  their  hats  at  $5.00.  Now  these  trade- 
marked  hats  and  the  staple,  unbranded  hats  selling 
at  $3.00  may  be  substantially  the  same  commodity, 
but  differentiated  by  detail  modifications.  These 
detail  differences  render  the  well-to-do  consumer 
willing  to  pay  a  higher  price  for  the  trade-marked 
hat.  No  doubt  the  demand  for  the  more  expensive 
hat  depends  in  part  upon  the  sense  of  security  on 
the  part  of  the  consumer  that  his  hat  will  be  of  good 
quality  and  of  proper  shape  if  it  bears  the  name  of 
these  producers.  This  feeling  of  security  forms  a 

50 


THE  DISTRIBUTOR 

part  of  the  subjective  valuation  that  the  consumer 
places  upon  the  hat.  No  doubt,  too,  motives  of 
social  emulation  sometimes  enter  in,  and  the 
consumer  derives  a  portion  of  his  gratification 
from  the  mere  fact  that  he  purchases  a  hat  which 
sells  at  a  higher  price  than  those  purchased  by  his 
less  well-to-do  neighbors. 

It  is  of  interest  to  note  that  other  manufacturers 
of  branded  hats  have  in  recent  years  fixed  their 
prices  at  $4.00  and  $6.00,  appealing  to  consumers 
upon  different  price  levels  from  those  reached  by 
prior  distributors  of  trade-marked  hats.  Thus 
they  reach  with  a  $4.00  hat  a  group  of  consumers 
not  available  to  the  distributors  of  $5.00  hats 
because  their  subjective  ratios  of  exchange  do  not 
render  them  willing  to  pay  $5.00  for  a  hat.  And 
with  a  $6.00  hat  they  draw  from  the  distributors 
of  $5.00  hats  a  part  of  those  consumers  whose  sub- 
jective valuation  upon  a  hat  renders  them  willing 
to  pay  more  than  $5.00  for  the  commodity. 

PRICE  POLICIES  OPEN  TO  THE  DISTRIBUTOR 

The  activity  of  the  more  advanced  distributors 
in  differentiating  commodities  has  tended  to  break 
down  the  orthodox  methods  and  policies  of  distribu- 
tion, and  this  necessitates  an  analysis  of  the  possible 
price  policies  of  the  present  day  merchant-producer. 

The  producer  who  today  enters  the  market  to 
manufacture  and  sell  a  commodity  in  competition 

51 


MARKET  DISTRIBUTION 

with  other  producers  of  substantially  identical 
products  has  open  to  him  three  general  price 
policies.  He  may  adopt  one  of  these  to  the 
exclusion  of  the  others,  or  may  use  them  in 
combination. 

These  three  policies  may  be  termed,  (1)  Selling 
at  the  market  minus,  (2)  Selling  at  the  market,  and 
(3)  Selling  at  the  market  plus. 

(1)  Selling  at  the  market  minus  is  that  policy 
which  aims  to  increase  sales  by  reducing  price. 
The  distributor  who  markets  his  product  at  a  price 
range  below  that  established  for  the  identical  com- 
modity as  sold  by  other  producers  not  only  attracts 
consumers  from  other  distributors,  but  also  brings 
into  the  market  as  consumers  certain  of  those 
whose  demand  was  before  unexpressed  because  the 
price  level  established  for  the  commodity  was 
above  that  warranted  by  their  subjective  valua- 
tion on  the  commodity. 

This  policy  does  not  ordinarily  involve  a  dif- 
ferentiation of  the  product  from  the  stock  prod- 
uct of  like  nature,  nor  the  use  of  trade  marks, 
brands  or  trade  names.  The  producer  depends 
upon  increased  sales  to  give  a  reduced  proportion  of 
overhead  expense  and  reduced  costs  of  large  scale 
production,  thus  increasing  his  area  of  profit.  The 
producer  appeals  to  the  consumer  mainly  through 
the  difference  in  price  level.  Hence,  the  successful 
pursuit  of  this  policy  in  a  competitive  market  over 

52 


THE  DISTRIBUTOR 

a  long  period  involves  a  continuing  ability  to  sell 
the  commodity  for  less  than  the  price  at  which 
other  producers  of  substantially  identical  products 
are  willing  or  able  to  market  them. 

This  policy  finds  illustration  in  the  selling  policy 
of  most  department  stores.  It  is  the  basis  of 
bargain-counter  selling.  In  one  class  of  depart- 
ment store  it  becomes  the  dominant  policy.  Some 
such  stores  base  their  business  almost  entirely  on 
selling  under  the  market,  advertising  the  purchase 
of  bankrupt  stocks  and  mill  clearances  as  making 
possible  such  price  cutting. 

And  in  nearly  all  department  stores  the  manager 
will  at  times  reduce  the  price  upon  a  staple  com- 
modity below  that  at  which  his  competitors  are 
willing  to  sell.  His  increased  sales,  arising  from 
custom  drawn  from  his  competitors  and  from  new 
consumers  brought  into  the  market,  decrease  the 
proportion  of  overhead  expense  and  enable  him  to 
purchase  in  larger  quantities.  His  larger  pur- 
chases put  him  in  a  position  to  force  the  producer 
to  share  with  him  the  economies  of  large  scale  pro- 
duction. Often,  indeed,  he  is  able  to  take  over  the 
entire  output  of  certain  factories. 

In  the  department  store,  moreover,  the  further 
element  enters  that  customers  attracted  to  pur- 
chase a  staple  commodity  at  less  than  the  prevail- 
ing price  will  also  purchase  other  commodities 
yielding  a  wider  margin  of  profit. 

53 


MARKET  DISTRIBUTION 

The  working  of  this  policy,  especially  as  to 
bringing  new  consumers  into  the  market,  is  shown 
graphically  in  Chart  I. 


Chart  I  —  Selling  at  the  Market  Minus 


This  chart  attempts  to  show  graphically  the  operation  on  the  demand  side  of  the 
market  of  the  price  policy  termed  "  selling  at  the  market  minus."  On  the  ordinate 
ox  is  laid  off  a  scale  of  prices  for  the  commodity.  On  the  abscissa  oy  are  laid  off  the 
number  of  purchasers.  The  arc  LM  shows  the  number  of  purchasers  at  a  given  price, 
growing  fewer  as  the  price  increases  and  greater  as  the  price  decreases. 

Now  if  on  represents  the  prevailing  market  price  for  the  commodity,  and  oc  the 
number  of  purchasers  at  that  price,  it  is  apparent  that  if  the  price  U  reduced  from  oa 
to  oa',  new  consumers  will  be  brought  into  the  market  and  the  number  of  purchasers 
at  the  price  oa'  will  be  oc',  a  number  greater  than  oc. 

It  is  somewhat  in  this  fashion  that  the  policy  of  selling  at  the  market  minus  operates, 
but  the  chart  does  not  indicate  the  important  element  that  other  producers  are  selling 
at  a  higher  level,  and  hence  customers  are  attracted  from  them,  as  well  as  new  cus- 
tomers brought  into  the  market. 

(2)  Selling  at  the  market  has  been  the  policy 
perhaps  most  characteristic  of  our  scheme  of  dis- 
tribution during  the  period  when  the  stress  was  on 
production.  It  is  still  a  common  policy  in  the 
marketing  of  staple  goods. 

This  policy  consists  briefly  in  the  acceptance  of 
the  market  price  existing  for  the  commodity  as  a 
fixed  condition.  The  producer  does  not  seek  to 

54 


THE  DISTRIBUTOR 

attract  purchasers  by  maintaining  a  price  level 
somewhat  lower  than  that  at  which  other  pro- 
ducers of  the  same  commodity  are  willing  to  sell, 
nor  does  he  attempt  to  establish  his  commodity 
upon  a  new  and  higher  price  level  as  a  distinct  com- 
modity. He  recognizes  the  market  price  for  such 
a  commodity  as  something  objective,  and  sells  his 
commodity  at  the  established  level. 

The  acceptance  of  this  price  policy  leaves  open 
to  the  merchant-producer  two  general  methods  of 
increasing  his  area  of  profit.  He  may  devote  him- 
self to  a  reduction  in  his  cost  of  production  by  a 
better  organization  of  his  plant,  or  he  may  seek  to 
increase  his  sales,  thus  giving  economies  of  large 
scale  production  and  a  reduced  proportion  of  over- 
head expenses. 

Examples  of  the  adoption  of  this  policy  and  the 
use  of  the  first  method  of  increasing  profits  are 
found  in  the  steel  industry.  The  small  indepen- 
dent manufacturer  often  accepts  the  market  price 
of  a  given  steel  product  as  a  fixed  condition,  sells 
his  "  share  "  of  the  market,  and  depends  upon  re- 
ducing his  plant  costs  to  increase  his  profits. 

If  the  merchant-producer  adopts  this  second 
method,  he  must,  in  general,  differentiate  his  prod- 
uct from  that  of  his  competitors  and  build  up  a 
demand  for  his  particular  product.  To  do  this  he 
must  depend  upon  the  same  means  that  would 
be  used  to  establish  his  product  as  a  distinct 

55 


MARKET  DISTRIBUTION 

commodity  upon  a  higher  price  level.  Trade  marks, 
brands  and  trade  names,  coupled  with  niceties  of 
finish,  evenness  in  quality  or  more  convenient 
packages,  serve  as  the  basis  for  an  increased  de- 
mand for  the  commodity  upon  the  same  price  level 
as  substantially  identical  products.  When  selling 
at  the  market,  superior  promptness  in  delivery 
may  become  a  factor  of  great  importance  in  in- 
creasing sales. 

A  recent  development  in  the  textile  industry 
illustrates  the  adoption  of  the  policy  of  selling  at 
the  market,  combined  with  an  attempt  to  increase 
sales  at  the  market  price  by  a  differentiation  of  the 
product.  Apparently  the  textile  manufacturers 
who  are  beginning  to  brand  their  goods  do  not  seek 
so  much  to  establish  a  new  price  level  for  their  prod- 
uct as  a  distinct  commodity,  as  to  increase  their 
sales  by  building  up  a  demand  for  their  commodity 
as  against  the  product  of  other  manufacturers  at 
the  prevailing  price  level. 

Chart  II  illustrates  one  phase  of  this  policy.  It 
is  intended  to  bring  out  the  idea  that  new  consum- 
ers may  be  drawn  into  the  market  at  an  existing 
price  level  by  giving  to  the  differentiated  commod- 
ity a  subjective  valuation  on  the  part  of  the  con- 
sumer greater  than  that  which  he  experienced  for 
the  stock  commodity  of  like  nature.  Hence,  while 
the  individual's  subjective  ratio  of  exchange  was 
too  low  to  lead  him  to  purchase  the  stock  commod- 

56 


THE  DISTRIBUTOR 

ity  at  the  prevailing  price,  he  may  purchase  the 
differentiated  commodity  at  that  price  because  of 
his  greater  subjective  valuation  upon  the  latter. 


L  L' 


Chart  II—  Selling  at  the  Market 


This  is  an  attempt  to  show  graphically  the  effect  of  a  stimulation  of  increased  de- 
mand for  a  commodity  without  any  increase  in  the  price  at  which  it  is  marketed. 

The  ordinate,  ox,  is  a  scale  of  increasing  price.  The  abscissa,  uy,  shows  the  num- 
ber of  purchasers.  The  arc  LM  indicates  the  number  of  purchasers  at  any  given  price, 
growing  less  as  the  price  is  increased  and  greater  as  the  price  is  decreased. 

If  the  established  market  price  is  represented  by  oa,  the  number  of  purchasers  at 
that  price  will  be  represented  by  oc.  If  then  by  stimulating  an  increased  demand 
for  his  product,  the  merchant-producer  is  able  to  increase  proportionally  the  number 
of  purchasers  at  each  price  level,  the  demand  curve  LM  will  be  replaced  by  L'M', 
and  at  the  price,  oa,  a  greater  number  of  purchasers,  oc',  will  purchase. 

This  chart  does  not,  of  course,  show  how  customers  already  in  the  market  are  drawn 
from  other  merchant-producers  to  the  purchase  of  a  differentiated  product  for  which 
a  demand  is  stimulated  at  the  same  price  level  as  the  products  of  the  other  merchant- 
producers. 

(3)  Selling  at  the  market  plus  is  perhaps  the  most 
characteristic  price  policy  of  modern  distribution. 
The  exceptionally  able  distributors  have  in  recent 
years  turned  more  and  more  to  this  policy.  They 
refuse  to  accept  as  a  fixed  condition  the  market 
price  for  the  commodities  similar  to  those  which 
they  produce.  They  isolate  their  product,  and 

57 


MARKET  DISTRIBUTION 

establish  it,  practically  as  a  new  commodity,  on  a 
different  price  level. 

The  whole  basis  of  the  policy  is  the  differentia- 
tion of  a  product  from  other  goods  of  substantially 
like  nature  by  improvements,  minor  or  substantial, 
and  the  identification  of  the  product  by  trade 
marks,  brands,  and  trade  names.  This  done,  the 
producer  stimulates  a  demand  for  his  product  by 
calling  attention  to  stability  of  quality,  niceties  of 
finish,  improvements  in  package  or  like  modifica- 
tions. He  appeals  to  that  portion  of  the  consuming 
public  whose  subjective  valuation  upon  the  stock 
commodity  has  left  them  a  so-called  "  consumer's 
surplus  "  over  the  market  price.  The  differentia- 
ted commodity  is  established  on  a  new  and  higher 
price  level,  and  is  to  all  intents  and  purposes  a  new 
commodity. 

It  is  this  policy  that  forms  the  most  severe  test 
of  the  ability  of  the  distributor.  To  succeed  he 
must  have  an  unusual  equipment,  including  knowl- 
edge of  human  nature,  of  the  psychological  organi- 
zation of  the  individual  consumer,  and  must  be 
able  to  give  proper  weight  to  such  motives  as  social 
emulation  and  all  the  varied  factors  that  enter  into 
the  subjective  ratio  of  exchange  of  the  consumer. 

This  policy  has  already  been  illustrated  by 
examples  from  the  hat  trade.  Examples  are  all 
about  us  today  and  further  illustration  is  here 
unnecessary. 


THE  DISTRIBUTOR 


Chart  III  shows  graphically  the  operation  of  the 
price  policy  termed  "  selling  at  the  market  plus." 


Chart  III  —  Selling  at  the  Market  Plus 


This  chart  illustrates  the  effect  of  the  price  policy  termed  "  selling  at  the  market 
plus."  On  the  ordinate  ox  is  laid  off  a  scale  of  prices  for  a  staple  commodity.  The 
abscissa  oy  shows  the  number  of  purchasers. 

The  demand  curve  L  J/  indicates  the  number  of  purchasers  at  a  given  price,  growing 
less  as  the  price  increases  and  greater  as  the  price  decreases.  Then  if  oa  represents 
the  market  price  of  the  staple  commodity,  oc  will  represent  the  number  of  purchasers. 
Now  if  the  merchant-producer  differentiates  his  product  from  the  staple  commodity 
and  stimulates  a  demand  for  it,  the  effect  is  to  increase  the  number  of  possible  pur- 
chasers at  each  price  level.  Thus  the  demand  curve  LM  is  replaced  by  the  demand 
curve  L'M'. 

Obviously  the  merchant-producer  may  dispose  of  the  differentiated  product  at  a 
price  oa',  higher  than  the  price  oa,  without  reducing  the  number  of  purchasers,  oc. 
In  other  words,  he  can  profit  by  the  increased  demand  through  raising  his  price  rather 
than  by  increasing  his  sales. 

THE  DIFFERENTIATION  OF  COMMODITIES 


It  is  apparent  that  the  process  we  see  going  on  as 
a  result  of  the  increasing  adoption  of  the  policy  of 
selling  at  the  market  plus,  involving  an  increasing 
differentiation  of  commodities  at  various  price 
ranges,  is  closely  analogous  to  the  creation  of  new 
commodities.  When  the  hat  trade  splits  up  into 
a  number  of  isolated  brands,  practically  distinct 

59 


MARKET  DISTRIBUTION 

commodities  at  different  price  levels,  the  situation 
is  from  a  social  point  of  view  little  different  from 
that  arising  from  the  creation  of  new  commodities 
which  are  not  merely  modifications  of  pre-existing 
commodities. 

If  the  safety  razor  be  regarded,  as  it  properly 
may  be,  as  a  new  commodity  rather  than  as  a  modi- 
fication of  the  old  style  razor,  it  provides  us  with  an 
opportunity  to  examine  the  social  justification  for 
the  creation  of  a  new  commodity. 

When  the  first  widely-advertised  safety  razor  was 
put  upon  the  market  at  $5.00  a  considerable  margin 
of  profit  was  left  the  producer.  It  was  often  said  at 
the  time  that  the  actual  cost  of  manufacture  of 
that  razor  was  less  than  $1.00.  Now  this  wide 
margin  made  possible  an  extensive  advertising 
campaign.  The  new  device  was  brought  to  the 
attention  of  the  entire  consuming  public.  Every- 
one, whether  in  the  large  centers  or  remote  dis- 
tricts, learned  of  the  safety  razor  and  its  uses. 
Great  numbers  purchased  the  razor  because  the 
subjective  valuation  which  they  placed  on  the 
commodity,  when  it  was  brought  to  their  attention, 
exceeded  the  price  asked.  The  large  reward  re- 
ceived by  the  distributor  may  perhaps  properly  be 
regarded  as  compensation  for  bringing  about  a 
better  adjustment  to  meet  human  needs. 

Today  the  safety  razor  demand  is  well  estab- 
lished and  those  consumers  whose  individual  ratios 

60 


THE  DISTRIBUTOR 

of  exchange  do  not  render  them  willing  to  pay  $5.00 
for  a  safety  razor  are  able  to  gratify  their  conscious 
need  at  prices  ranging  as  low  as  twenty -five  cents, 
owing  to  numerous  producers  entering  the  market 
with  safety  razors  at  varying  price  levels. 

Now  when  the  producer  of  a  commodity  already 
marketed  by  other  producers  sets  off  his  commod- 
ity from  others  of  like  kind,  and  by  sometimes  even 
minor  modifications  and  improvements  is  enabled 
to  build  up  a  demand  for  it  on  a  higher  price  level 
than  that  existing  for  the  stock  commodity  of  like 
kind,  he,  too,  has  made  possible  a  more  accurate 
adjustment  in  supplying  human  wants,  and  has 
brought  the  possibility  of  this  more  accurate  ad- 
justment to  the  attention  of  consumers.  The  pur- 
chaser of  a  trade-marked  hat  at  $5.00  would  buy  a 
staple  hat  for  $3.00,  if  the  $5.00  hat  did  not  give 
him  equal  or  greater  proportional  gratification, 
taking  into  account  the  differing  objective  ratio  of 
exchange.  Obviously,  the  consumer  who  buys  a 
trade-marked  hat  does  so  because  he  prefers  to  pay 
$5.00  for  such  a  hat  rather  than  $3.00  for  an  un- 
branded  stock  hat.  To  say  that  he  ought  not  to 
be  willing  to  pay  the  additional  $2.00  for  the 
differentiated  product  because  the  modifications 
are  not  substantial  is  to  attempt  to  substitute  for 
the  subjective  valuation  of  the  consumer  an  exter- 
nal social  standard  as  a  basis  of  exchange.  The 
more  highly  differentiated  the  scale  of  commodi- 

Gl 


MARKET  DISTRIBUTION 

ties  is,  the  more  accurately  will  it  be  possible  for 
the  individual  consumer  to  satisfy  his  varied 
material  wants. 

The  distributor  who  is  successful  in  establishing 
a  differentiated  product  as  a  distinct  commodity 
on  a  new  price  level  is,  for  a  time,  in  the  position  of 
having  a  monopoly  as  to  the  differentiated  com- 
modity. Such  competition  as  he  has  is  the  indirect 
competition  of  the  staple  commodity  of  like  nature. 
His  monopolistic  position  often  enables  him  to 
obtain  temporarily  a  margin  of  profit  dispropor- 
tionate to  the  actual  improvements  in  the  differ- 
entiated product  as  compared  with  the  staple 
commodity  of  similar  nature.  This,  again,  may 
be  justified  as  a  reward  for  enterprise  in  making 
possible  a  more  exact  adjustment  of  goods  to  the 
wants  of  the  consumer.  And  in  the  long  run,  the 
large  percentage  of  profit  will  decrease  as  other 
producers  follow  his  example  and  differentiate 
their  products  from  the  staple.  The  rise  of  com- 
petition at  the  new  price  level  will  ultimately  force 
in  the  competing  differentiated  commodities  the 
substantial  improvements  warranted  by  the  higher 
price. 

Where  the  differentiation  of  a  product  from 
staple  articles  of  like  nature  is  not  aimed  at 
establishing  a  higher  price  level,  but  rather  at  an 
increase  of  sales  at  the  prevailing  price  level,  an  in- 
disputable social  gain  appears.  Manufacturers 

62 


THE  DISTRIBUTOR 

of  trade-marked  goods  inevitably  find  it  necessary 
to  put  stress  upon  quality  and  so  to  organize  pro- 
duction that  this  quality  shall  be  kept  uniform. 
The  manufacturer  of  unbranded  goods  on  the 
other  hand  does  not  feel  the  sense  of  responsibility 
to  the  consumer  that  exists  when  the  goods  reach 
the  consumers  under  the  producer's  name.  The 
manufacturer  of  unbranded  goods  makes  them 
generally  to  sell  to  the  middleman;  not  primarily 
to  satisfy  the  consumer  since  he  has  no  certain 
way  of  profiting  by  this  satisfaction. 


63 


CHAPTER  III 

METHODS  OF  DISTRIBUTION 

THE  general  market  problem  which  confronts  the 
business  man  has  been  roughly  analyzed.  The 
differing  modern  price  policies  have  been  outlined. 
Something  has  been  said  as  to  the  social  justifica- 
tion of  the  increasing  differentiation  of  goods  in- 
volved in  certain  price  policies.  We  now  may 
examine  the  methods  employed  in  selling. 

In  the  early  stages  of  our  industrial  history,  sales 
were  made  in  bulk.  At  all  stages  in  distribution, 
the  purchaser  saw  the  actual  goods  before  the  sale 
was  made. 

Later,  sale  by  sample  appeared.  The  purchaser 
bought  goods  represented  to  be  identical  with  the 
sample  he  was  shown.  The  introduction  of  this 
method  of  sale  was  necessitated  by  the  widening  of 
the  market  and  was  made  possible  by  improvement 
in  commercial  ethics  and  by  increasing  standardi- 
zation of  the  product.  The  purchaser  must  have 
confidence  not  only  in  the  honest  intention  of  the 
producer  to  furnish  goods  identical  with  the 
sample,  but  also  in  his  ability  to  produce  identical 
goods.  Hence,  increasing  uniformity  in  product 

64 


METHODS  OF  DISTRIBUTION 

through  machine  methods  of  manufacture  was  a 
factor  in  the  increase  of  sale  by  sample. 

Sale  by  description  is  the  most  modern  develop- 
ment in  distribution.  An  even  higher  ethical 
standard  is  required  than  for  sale  by  sample. 
Moreover,  sale  by  description  requires  a  higher 
level  of  general  intelligence  than  sale  in  bulk  or 
sale  by  sample.  Sale  by  description  in  its  modern 
development  is,  in  a  sense,  a  by-product  of  the 
printing  press. 

All  three  methods  of  sale  are  in  use  in  modern 
commercial  life.  The  consumer  still  purchases  a 
large  part  of  the  commodities  which  he  uses  under 
a  system  of  sale  in  bulk.  He  sees  the  goods  before 
he  buys  them.  The  middleman,  buying  in  larger 
quantities,  generally  purchases  from  sample.  But 
sale  by  description  becomes  each  year  of  increasing 
importance  at  every  stage  in  the  system  of  distri- 
bution. Even  where  the  purchaser  actually  sees  a 
sample  or  the  goods  themselves  before  the  sale  is 
concluded,  the  method  of  sale  by  description  has 
in  many  cases  previously  been  used  to  create  in 
him  a  demand  for  the  commodity.  Sale  by  de- 
scription is  found  not  only  in  goods  for  consump- 
tion, but  also  in  the  sale  of  machinery  and  like 
commodities.  So  rapid  has  been  the  development 
that  Mr.  Edison,  the  inventor,  has  said  that  he 
expects  the  store  of  the  future  to  be  upon  the 
slot  machine  plan,  all  the  goods  being  sold  by  de- 

65 


MARKET  DISTRIBUTION 

scription.  That  even  the  conception  of  such  an 
arrangement  can  arise  is  significant. 

The  root  idea  in  sale  by  description  is  the  com- 
munication of  ideas  about  the  goods  to  the  pro- 
spective purchaser  by  spoken,  written,  or  printed 
symbols.  This  takes  the  place  of  the  sight  of  the 
goods  themselves  or  a  sample  of  them.  It  is  ob- 
vious that  this  requires  that  the  purchaser  shall 
have  sufficient  intelligence  to  grasp  readily  ideas 
either  through  spoken,  written,  or  printed  symbols. 

The  use  of  the  term  "  symbols  "  rather  than 
"  words  "  is  necessitated  by  the  fact  that  photo- 
graphs and  sketches  are  today  an  important  fea- 
ture of  sale  by  description.  A  photograph  of  the 
commodity  often  serves  the  purpose  of  pages  of 
verbal  description. 

The  ideas  to  be  conveyed  to  the  prospective  pur- 
chaser in  sale  by  description  are  such  as  will 
awaken  an  effective  demand  for  the  commodity  hi 
question.  The  awakening  of  demand  is  the  essen- 
tial element  in  selling.  It  must  be  remembered, 
however,  that  the  distributor  has  the  further  task 
to  provide  for  the  possibility  of  gratifying  the 
demand  by  making  the  goods  physically  available 
to  the  buyer.  In  sale  in  bulk  this  problem  merges 
with  the  selling  since  the  goods  are  physically 
present  when  the  sale  is  made,  while  in  sale  by 
description  the  physical  distribution  of  the  goods 
is  a  distinct  problem  from  the  awakening  of 

66 


METHODS  OF  DISTRIBUTION 

demand.  And  it  is  a  problem  that  requires  equal 
attention,  for  it  is  useless  to  awaken  demand  unless 
the  goods  to  satisfy  it  are  made  available. 

AVAILABLE  AGENCIES  FOB  SELLING 

As  demand  creation  is  the  initial  step  in  distri- 
bution, it  is  necessary  to  consider  the  agencies  for 
this  purpose  available  to  the  merchant-producer. 
There  are  three  general  agencies  to  be  considered: 
(1)  middlemen,  (2)  the  producer's  own  salesman, 
and  (3)  advertising,  direct  and  general.  The  busi- 
ness man  faces  the  problem  of  what  agency  or 
what  combination  of  agencies  is  the  most  efficient 
for  the  creation  of  demand  and  the  physical  supply 
of  his  particular  commodity. 

The  method  of  sale  adopted  will  largely  govern 
the  choice  of  agency  to  be  employed.  If  the  sale 
is  to  be  in  bulk,  the  purchaser  viewing  the  actual 
goods  before  the  purchase  is  made,  distribution 
through  a  series  of  middlemen  is  generally  most 
feasible.  However,  such  sale  in  bulk  through  the 
producer's  own  salesmen  is  possible  in  some  cases. 
Small  household  appliances  are  often  sold  in  this 
manner  by  door-to-door  salesmen. 

If  sale  by  sample  is  the  general  method  adapted 
to  the  commodity  in  question,  middlemen  or  sales- 
men will  often  be  the  more  desirable  agencies. 
Many  commodities  are  distributed  through  mid- 
dlemen, the  sale  at  each  stage  in  the  process  being 

67 


MARKET  DISTRIBUTION 

by  sample  save  for  the  final  stage  from  retailer  to 
consumer,  where  the  sale  is  in  bulk.  Direct  sales- 
men, perhaps  in  the  majority  of  cases,  sell  from 
sample.  And  even  selling  by  direct  advertising 
alone  is  in  some  cases  adapted  to  a  method  of  sale 
by  sample.  Thus  the  distributor  by  mail  of  a  com- 
modity which  is  not  bulky  may  enclose  in  his  direct 
advertising  material  a  sample  of  the  commodity. 

Where  sale  by  description  is  used  exclusively, 
advertising,  direct  or  general,  is  likely  to  be  the 
most  efficient  agency.  Yet  here  again  it  is  possible, 
though  generally  not  economical,  to  distribute  a 
commodity  through  a  series  of  middlemen  and  yet 
the  sale  at  each  stage  be  accomplished  by  descrip- 
tion. And  the  use  of  salesmen  in  selling  by  de- 
scription is  common,  as  where  heavy  machinery  is 
sold  by  the  use  of  photographs,  or  hardware  and 
like  commodities  from  catalogues. 

The  number  of  possible  combinations  of 
methods  and  agencies  renders  the  problem  of  the 
producer-merchant  an  intricate  one.  It  will  be 
seen  that  he  has  a  difficult  task  in  analyzing  the 
market  with  reference  to  his  goods,  and  in  working 
out  that  combination  of  methods  and  agencies 
which  will  give  him  the  most  efficient  system  of 
distribution. 

It  is  necessary,  however,  to  turn  to  a  brief  con- 
sideration of  the  position  of  the  middleman  as  a 
part  of  the  evolution  of  organized  distribution. 

68 


METHODS  OF  DISTRIBUTION 

The  history  of  the  middleman's  functions  has  not 
yet  been  adequately  studied,  but  a  tentative  sug- 
gestion may  be  made  in  default  of  the  fuller  study 
which  the  subject  deserves. 

THE  MIDDLEMAN  IN  DISTRIBUTION 

The  middleman  is  a  by-product  of  a  complex 
industrial  organization.  Chart  IV  shows  in  rough 
outline  the  evolution  of  the  middleman  from  the 
early  period  when  producer  dealt  directly  with 
consumer  to  the  appearance  of  the  orthodox  type 
of  distribution  (late  in  the  eighteenth  century 
and  in  the  first  quarter  of  the  nineteenth  century) 
when  a  complicated  series  of  middlemen  existed. 
It  should  be  noted  that  this  chart  represents  the 
typical  case  of  the  domestic  product  rather  than 
that  of  imported  commodities. 

In  the  more  primitive  barter  economy,  the  pro- 
ducer deals  directly  with  the  consumer,  and  mid- 
dlemen take  no  part  in  the  transaction.  In  the 
medieval  period,  as  the  handicrafts  become  spe- 
cialized occupations  under  a  town-market  regime, 
the  producer  is  a  retailer  and  sells  directly  to  the 
consumers.  Then  as  the  market  widens,  a  division 
of  labor  is  necessary  and  the  merchant  appears  as 
an  organizer  of  the  market.  The  handicraftsman 
becomes  a  steady  worker,  no  longer  concerning 
himself  with  selling.  He  becomes  in  many  cases 
practically  an  employee  of  the  merchant-retailer, 


MARKET  DISTRIBUTION 


I 

Z      S' 


70 


METHODS  OF  DISTRIBUTION 

who  provides  the  stock  and  bears  the  risk.  The 
merchant  takes  the  finished  goods  from  the  pro- 
ducer and  sells  them  to  the  consumer. 

Steadily  the  market  widens  until  we  find  a 
national  market.  The  merchant  is  no  longer  a 
single  intermediary  between  the  producer  and  the 
consumer.  The  merchant  who  takes  the  goods 
from  the  producer  disposes  of  them  to  retail  mer- 
chants who  in  turn  distribute  them  to  the  con- 
sumer. After  a  long  period,  we  find  the  producers 
gradually  strengthening  their  financial  position, 
and  freeing  themselves  from  the  control  of  a  single 
merchant.  They  become  merchant-producers. 
They  assume  the  burden  of  production,  and  dispose 
of  the  product  to  various  wholesalers  who  in  turn 
sell  to  retailers,  and  they  to  the  consumers.  As  a 
world  market  appears,  the  producer  disposes  of  a 
part  of  his  product  to  the  export  merchant. 

In  the  early  days  of  the  factory  system,  shown 
in  Chart  V,  we  find  that  the  producers  have  lost 
their  character  as  merchants  and  are  devoting 
themselves  to  the  problems  of  production.  The 
pressure  on  production  has  continued,  and  with 
the  increasing  intricacy  of  industry  producers  have 
found  it  necessary  to  concentrate  their  attention 
on  production.  The  selling  agent  appears  as  a 
link  in  the  chain  of  distribution  to  relieve  the  pro- 
ducer of  the  task  of  selling  his  product.  The 
selling  agent  undertakes  to  sell  the  entire  output 

71 


MARKET  DISTRIBUTION 

of  the  producer.  He  distributes  it  among  whole- 
salers, who  in  turn  distribute  it  to  retailers,  and  the 
retailers  to  the  consuming  public. 

This  may  be  termed  the  orthodox  type  in  dis- 
tribution, a  type  almost  universal  in  the  early 
decades  of  the  nineteenth  century,  and  still  com- 
mon, as  in  the  textile  industry  in  New  England. 

Just  as  the  long  period  of  development  from  a 
system  of  barter  economy  to  the  early  decades  of 
the  factory  system  showed  a  continuous  tendency 
for  increase  in  the  number  of  middlemen  interven- 
ing between  the  producer  and  the  consumer,  so 
recent  years  have  shown  a  growing  tendency  to 
decrease  the  number  of  successive  steps  in  distri- 
bution. The  tendency  is  apparent  in  nearly  every 
industry  and  has  been  clearly  marked  in  recent 
years. 

Under  the  orthodox  type  of  distribution,  with 
numerous  middlemen  intervening  between  the  pro- 
ducer and  the  consumer,  the  producer's  position  is 
not  an  advantageous  one.  The  fixed  charges 
under  which  he  operates  make  it  almost  imperative 
that  he  operate  continuously.  The  outlet  for  his 
goods,  however,  is  controlled  by  middlemen. 
Hence  the  middleman  is  able  to  exert  pressure  upon 
the  producer  and  force  a  narrowing  of  his  margin 
of  profit.  It  was  on  account  of  this  pressure  and 
in  order  to  free  themselves  from  it  that  the  stronger 
producers  (merchant-producers  now)  sought  to 

72 


METHODS  OF  DISTRIBUTION 

find  ways  of  going  around  the  middlemen,  and 
establish  more  direct  contacts  with  consumers. 

Chart  V  is  an  attempt  to  show  diagrammati- 
cally  the  development  of  this  apparent  tendency  to 
decrease  the  number  of  middlemen.  By  the  use 
of  salesmen  going  directly  to  the  wholesaler  and  by 
advertising  directed  to  the  retailer  the  producer 
has  displaced  the  selling  agent  in  many  cases. 
Sometimes  the  advertising  is  directed  not  only  to 
the  retailers  but  also  to  the  wholesalers.  To 
strengthen  his  position  still  further,  the  producer 
will  often  use  advertising  directed  to  the  consumer 
to  build  up  a  demand  for  his  product.  This  in- 
volves the  development  of  a  product  differentiated 
by  trade  mark,  brand,  or  trade  name.  When  the 
producer  thus  directly  builds  up  a  demand  among 
consumers,  he  often  takes  the  further  step  of  send- 
ing his  salesmen  to  the  retailer,  thus  omitting  the 
wholesaler  entirely  from  his  system  of  distribution. 

The  most  extreme  step  in  the  process  is  the 
complete  elimination  of  middlemen,  and  the  sale 
direct  from  the  merchant-producer  to  the  con- 
sumer, either  by  advertising  alone  or  by  salesmen 
supplemented  by  advertising.  Manufacturers  of 
specialties  have  largely  adopted  this  scheme  of 
distribution  and  the  enormous  growth  of  the  mail 
order  business  in  recent  years  gives  evidence  that 
in  some  lines  of  distribution  apparently  there  are 
economies  in  this  system. 

73 


MARKET  DISTRIBUTION 


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74 


METHODS  OF  DISTRIBUTION 

The  tendency  to  decrease  the  number  of  middle- 
men is  one  of  the  most  characteristic  features  of 
modern  distribution.  It  promises  to  show  much 
greater  development  in  the  future  if  present  eco- 
nomic conditions  substantially  continue.  The 
attempts  of  associations  of  retailers  to  check  the 
growth  of  direct  selling  have  thus  far  not  been  suc- 
cessful. In  their  desire  to  force  the  manufacturer 
to  dispose  of  his  product  through  regular  trade 
channels  they  have  at  times  taken  concerted  action 
to  discourage  direct  sales.  But  our  national  and 
state  laws  prohibiting  combinations  in  restraint  of 
trade  prevent  effective  agreements  of  this  sort. 
And  the  advantages  of  direct  selling  in  some  lines 
render  the  producer  willing  to  incur  the  disfavor  of 
the  trade. 

It  should  be  noted,  however,  that  changed 
conditions  might  give  the  middleman  increased 
importance.  Suppose,  for  instance,  that  the  pro- 
tective tariff  system  of  the  United  States  were  to 
be  swept  away  and  free  trade  instituted.  The 
middleman  could  then  draw  upon  the  foreign  pro- 
ducer for  supplies  of  unbranded  staple  goods, 
which  might  serve  to  increase  his  importance  as  a 
link  in  our  system  of  distribution.  While  this 
would  perhaps  tend  to  increase  the  number  of 
successive  middlemen  in  some  lines,  it  is  probable 
that  when  the  foreign  producer  in  turn  was  sub- 
jected to  pressure  by  the  middleman,  he,  too,  would 

75 


MARKET  DISTRIBUTION 

tend  to  go  around  him  and  deal  directly  with  the 
consumer. 

THE  FUNCTIONS  OF  THE  MIDDLEMAN 

To  understand  what  seems  to  be  a  present  ten- 
dency to  go  around  the  middleman  as  well  as  to 
consider  the  problem  of  the  merchant-producer 
with  reference  to  the  use  of  middlemen  hi  distribu- 
tion, it  is  necessary  to  analyze  the  functions  per- 
formed by  the  middleman.  Roughly  the  general 
functions  may  be  listed  as  follows : 

1.  Sharing  the  risk. 

2.  Transporting  the  goods. 

3.  Financing  the  operations. 

4.  Selling  (communication  of  ideas  about  the 
goods). 

5.  Assembling,  assorting,  and  re-shipping. 
These  functions  were  at  first  taken  over  by  areas; 

that  is,  each  successive  middleman  in  the  series 
took  over  a  part  of  each  function.  Each  took  the 
risk  of  destruction  of  the  goods  while  he  held  title. 
Each  took  the  risk  of  credit  losses.  Each  took  a 
share  in  the  transportation  of  the  goods  along  the 
route  from  the  producer's  stock  room  to  the  hands 
of  the  consumers.  Each  took  a  part  in  financing 
the  entire  operation.  Each  had  a  part  in  the  sell- 
ing, disposing  of  the  goods  he  purchased  to  suc- 
ceeding middlemen  and  finally  to  the  consumer. 
And  each  finally  took  a  part  in  assembling,  assort- 

76 


METHODS  OF  DISTRIBUTION 

ing,  and  re-shipping  the  goods  to  make  them 
physically  available  to  the  consumer. 

But  at  a  relatively  early  date  a  taking  over  of 
these  functions  by  kind  instead  of  by  area  ap- 
peared. Today  we  have  what  may  be  termed 
functional  middlemen  in  the  insurance  companies, 
direct  transportation  companies,  and  banks. 

The  insurance  company  is  in  a  real  sense  a  mid- 
dleman in  distribution.  When  it  insures  the  pro- 
ducer against  loss  of  goods  by  fire,  against  credit 
losses,  and  the  like,  it  is  taking  over  the  function 
of  risk  formerly  shared  by  successive  middlemen. 
Today  the  insurance  company  will  assume  practi- 
cally the  entire  element  of  risk.  It  is  possible,  for 
instance,  for  a  large  department  store  to  insure 
against  unseasonable  holiday  weather.  The  in- 
surance company  differs  from  the  ordinary  middle- 
man in  that  it  takes  over  one  function  as  such 
rather  than  portions  of  a  number  of  functions. 

So  improvements  in  direct  transportation  have 
enabled  the  producer  to  turn  to  a  functional  mid- 
dleman to  convey  the  goods  to  the  consumer.  The 
transportation  companies  and  the  express  com- 
panies are  in  a  true  sense  middlemen  in  distribu- 
tion, though  they  perform  but  one  of  the  functions 
formerly  shared  by  the  successive  middlemen 
who  took  over  functions  by  area.  The  physical 
conveyance  of  the  goods  to  the  consumer  was 
formerly  one  of  the  most  important  functions  per- 

77 


MARKET  DISTRIBUTION 

formed  by  a  series  of  middlemen.  Hence  every 
improvement  in  the  agencies  of  direct  transporta- 
tion has  tended  to  modify  existing  systems  of  dis- 
tribution. It  is  this  fact  that  gives  importance 
to  the  projected  establishment  of  a  parcel  post.1 

So  the  function  of  financing  the  operations  has 
largely  been  taken  from  the  regular  middleman. 
In  former  times  the  middleman  took  his  part  in 
the  burden  of  finance  in  addition  to  his  other  func- 
tions. It  is  true  today  in  the  textile  industry  in 
New  England  that  the  selling  agent  is  as  much  a 
banker  as  a  mere  agency  for  the  sale  of  the  goods. 
This  is  accomplished,  however,  by  the  selling 
agent's  endorsing  the  commercial  paper  of  the 
producer,  giving  a  two-name  paper  acceptable  by 
savings  banks  in  that  region,  and  hence  making  it 
possible  to  tap  an  important  reservoir  of  capital  as 
well  as  to  secure,  a  lower  rate  of  interest. 

In  most  industries  today  the  bank,  as  a  func- 
tional middleman,  cares  for  the  element  of  finance 
in  the  operations  of  distribution.  By  advancing 
on  goods  and  on  commercial  paper,  it  largely  ab- 
sorbs the  function  of  finance  in  distribution. 

1  Since  the  first  appearance  of  this  essay,  the  parcel  post  has  been 
put  into  successful  operation  in  all  parts  of  the  United  States.  It  is 
too  early  as  yet  to  forecast  its  effect  upon  our  present  system  of  dis- 
tribution. It  is  being  employed,  however,  by  producers  and  distrib- 
utors of  all  classes  (local  retail  merchants  as  well  as  catalogue  houses) 
to  maintain  direct  and  constant  touch  with  consumers — particularly 
with  farmers  and  dwellers  in  sparsely  populated  districts. 

78 


METHODS  OF  DISTRIBUTION 

Legislation  providing  for  an  asset  currency  based 
on  commercial  paper  might  widen  the  range  of 
the  banks'  activity  in  the  commercial  field.1 

Another  development  has  lessened  the  financial 
dependence  of  the  producer.  The  application  of 
the  corporate  form  to  industrial  organization  has 
made  it  possible  to  draw  together  larger  bodies  of 
operating  capital  and  hence  to  place  the  producer 
in  a  stronger  financial  position. 

As  a  result  of  the  development  of  functional 
middlemen,  ready  to  assume  the  risk,  transport  the 
goods,  and  finance  operations,  the  importance  of 
the  middleman  for  these  functions  has  diminished. 
There  remain  the  functions  of  selling  (the  com- 
munication of  ideas  about  the  goods)  and  of 
assembling,  assorting,  and  re-shipping.  Here  the 
middleman  is  of  most  importance  today. 

Under  the  orthodox  type  of  distribution  which 
we  have  considered  above,  the  producer  is  not  in 
any  sense  a  merchant.  The  selling  agent  takes 
upon  himself  the  initial  distribution  of  the  entire 
output.  He  sells  the  goods  to  the  wholesaler. 
The  basis  of  the  sale  is  that  the  wholesaler  can  dis- 
pose of  the  goods  at  a  profit  to  the  retailer.  The 
wholesaler  in  turn  sells  the  goods  to  the  retailer. 

1  The  establishment  of  the  Federal  Reserve  Bank  system,  since 
this  chapter  was  written,  has  produced  this  effect  of  a  more  elastic 
currency  based  on  commercial  paper  and  trade  acceptances,  with 
a  corresponding  gain  in  credit  resources  and  banking  power. 

79 


MARKET  DISTRIBUTION 

Again  the  inducement  to  purchase  is  not  primarily 
quality  or  service  but  the  opportunity  to  re-sell  at  a 
profit  to  the  actual  consumer.  Only  when  the 
retailer  comes  to  sell  to  the  consumer  does  stress 
fall  upon  quality  and  service,  as  the  inducement  to 
the  sale.  Hence  the  ideas  to  be  conveyed  to  the 
prospective  purchaser  to  create  in  him  a  demand 
for  the  goods  vary  at  different  steps  in  the  com- 
plicated process  of  distribution,  because  of  the 
different  points  of  view  of  those  who  buy  for  re- 
sale and  those  who  buy  for  consumption.  Price 
and  saleability  are  the  all-important  factors  to  the 
middleman;  quality  and  service  are  as  important 
to  the  consumer  as  price. 

The  tendency  of  the  orthodox  system  of  distri- 
bution of  unbranded  commodities  is  to  turn  the 
energies  of  the  producer  primarily  toward  lowering 
the  cost  of  production  and  hence  the  price  which 
he  is  able  to  offer  the  middleman.  The  influence 
of  satisfaction  or  dissatisfaction  on  the  part  of  the 
consumer  comes  to  him  only  indirectly  through  a 
chain  of  middlemen.  Moreover,  where  the  goods 
are  undifferentiated  by  trade  mark  or  trade  name, 
their  identity  is  often  completely  lost  in  the  succes- 
sive stages  of  distribution.  Even  the  retailer  in 
many  cases  concerns  himself  rather  with  saleabil- 
ity than  with  ultimate  satisfaction  to  the  consumer. 
Hence,  only  marked  defects  in  quality  are  likely 
to  be  brought  to  the  attention  of  the  producer. 

so 


METHODS  OF  DISTRIBUTION 

Thus  the  producer  loses  the  touch  with  the  con- 
sumer which  will  assist  him  to  make  improvements 
in  quality  and  service  in  his  goods.  His  atten- 
tion is  not  forced  upon  those  elements  in  the  com- 
modities which  he  manufactures.  So  under  the 
orthodox  type  of  distribution  of  unbranded  com- 
modities the  standard  of  the  producer  tends  to 
become  saleability  rather  than  satisfaction  to  the 
consumer. 

Suppose,  however,  the  producer  does  give  con- 
scious attention  to  elements  of  quality  and  service 
in  his  goods  which  render  them  more  desirable 
from  the  standpoint  of  the  ultimate  consumer  than 
other  goods  of  like  nature.  Before  the  knowledge 
of  these  superior  points  reaches  the  consumer  it 
must  be  passed  along  by  two  or  more  middlemen, 
who  are  not  for  the  most  part  primarily  interested 
in  quality  or  service  and  no  one  of  whom  ordinarily 
gives  undivided  attention  to  the  single  commodity. 
The  ideas  that  the  retailer  must  communicate  to 
the  consumer  to  create  in  him  a  desire  for  the 
commodity  are  not  the  ideas  which  the  whole- 
saler conveyed  to  the  retailer  to  induce  him  to 
purchase. 

Hence  a  producer  who  has  added  to  his  goods 
special  advantages  in  quality  or  service  finds  it 
difficult  to  convey  to  the  consumer  through  a  chain 
of  middlemen  the  precise  ideas  about  those  advan- 
tages that  will  lead  the  consumer  to  demand  his 

81 


MARKET  DISTRIBUTION 

goods  in  preference  to  those  of  another  manufac- 
turer. 

These  considerations  render  the  increasing  com- 
munication of  ideas  about  the  goods  by  the  pro- 
ducer directly  to  the  consumer  an  innovation  of 
great  social  significance  in  our  scheme  of  distribu- 
tion. The  producer  is  forced  to  study  the  con- 
sumer's wants  and  to  adjust  his  product  to  them. 
He  can  no  longer  devote  his  attention  exclusively 
to  cost.  He  realizes  that  the  consumer's  satisfac- 
tion depends  on  the  quality  of  the  goods  and  the 
service  that  they  render.  These  become  to  him 
considerations  as  important  as  that  of  cost.  More- 
over, when  he  works  out  in  his  product  some 
improvement  in  quality  or  service  which  more  ade- 
quately adapts  the  commodity  to  the  wants  of  the 
consumer,  he  is  able  to  convey  to  the  consumer 
precise  and  accurate  knowledge  of  these  improve- 
ments and  to  reap  in  increased  demand  for  his 
product  the  reward  for  his  efforts.  Direct  selling 
means,  of  necessity,  a  better  adjustment  of  pro- 
duction to  the  needs  of  the  consumer.  Goods  are 
being  made  to  satisfy  rather  than  to  sell. 

Obviously,  direct  selling  depends  on  a  differen- 
tiation of  commodities.  The  producer  can  effec- 
tively communicate  ideas  about  his  goods  directly 
to  the  consumer  only  when  the  consumer  is  able  to 
identify  the  goods.  Where  the  physical  distribu- 
tion is  through  retail  stores,  the  goods  must  be 

82 


METHODS  OF  DISTRIBUTION 

distinguished  from  other  goods  of  like  nature  by 
trade  mark,  brand  or  trade  name,  or  the  direct 
selling  efforts  of  the  producer  are  wasted. 

The  advantages  of  direct  communication  of  ideas 
about  the  goods  by  the  producer  to  the  consumer 
as  just  outlined  cooperate  with  the  desire  of  the 
producer  to  escape  pressure  exerted  by  the  middle- 
man. As  a  result  we  find  in  the  past  half -century 
and  especially  in  the  past  decade  a  rapid  adoption 
by  producers  of  agencies  for  direct  communication 
of  ideas  about  the  goods  to  the  consumer.  This 
means  that  another  function  formerly  divided 
among  middlemen  is  being  taken  over  as  a  func- 
tion entire.  Newspapers,  periodicals  and  other 
advertising  agencies  may  hence  be  termed  func- 
tional middlemen,  as  were  the  insurance  companies, 
the  transportation  companies  and  the  banks.  And 
with  the  rise  in  importance  of  these  functional 
middlemen  the  position  of  the  old  type  of  middle- 
men is  again  weakened. 

We  have  still  to  discuss  the  functions  of  assem- 
bling, assorting,  and  re-shipping.  These  functions 
render  the  goods  physically  available  to  consumers 
so  that  an  aroused  demand  can  be  gratified.  Here 
the  middleman  retains  for  the  most  part  his  im- 
portance. To  be  sure,  we  find  direct  shipments 
from  producer  to  consumer  steadily  increasing. 
This  is  to  be  expected  as  a  consequence  of  the 
direct  communication  of  ideas  about  the  goods  by 

83 


MARKET  DISTRIBUTION 

the  producer  to  the  consumer.  But  in  the  more 
important  lines  today  the  consumer  still  depends 
on  the  retail  store  for  the  supply  of  the  goods  for 
which  a  demand  has  been  stimulated  and  the  retail 
store  in  general  turns  for  its  supply  to  the  whole- 
saler. 

The  problem  of  the  distributor  is  two-fold:  (1) 
to  arouse  a  maximum  of  demand,  and  (2)  to  supply 
that  demand  with  a  minimum  of  leakage.  The 
second  phase  of  the  problem  involves  the  elements 
of  time,  convenience  and  service.  If  the  demand 
which  has  been  aroused  among  consumers  is  to  be 
fully  utilized,  it  must  be  made  possible  for  them  to 
obtain  the  goods  promptly  when  the  demand  arises. 

It  must  be  convenient  for  them  to  obtain  the 
goods.  In  many  cases,  certain  collateral  services 
such  as  instruction,  demonstration  and  repairs  must 
be  given.  It  is  here  that  the  retailing  middleman 
still  retains  his  importance  in  most  lines.  If,  when 
a  conscious  demand  has  been  raised  for  a  certain 
food  product  by  the  direct  communication  of  ideas 
about  the  goods  by  the  producer  to  the  consumer, 
the  latter  is  unable  to  find  the  product  at  a  con- 
venient grocery  store,  the  aroused  demand  is  likely 
to  be  ineffective.  Hence  the  producer  will  often 
continue  to  distribute  his  product  through  the 
regular  trade  channels  after  taking  over  the  selling 
function  by  directly  communicating  ideas  about 
the  goods  to  the  consumer.  Distribution  by  mail 

84 


METHODS  OF  DISTRIBUTION 

order  and  direct  shipment  by  the  producer  have 
thus  far  proved  applicable  only  to  certain  commod- 
ities and  in  reaching  certain  sections  and  classes. 
For  many  lines  and  in  many  districts  the  middle- 
man is  as  much  a  social  necessity  as  ever. 

When  a  producer  begins  to  communicate  ideas 
about  goods  directly  to  the  consumer  to  arouse  a 
demand,  it  is  apparent  that  the  middleman  is  per- 
forming only  a  part  of  the  functions  he  previously 
performed.  On  strict  economic  grounds  the  margin 
of  profit  of  the  middleman  should  be  reduced  in 
proportion  to  the  reduction  of  his  functions. 

In  compensation  for  this  reduced  margin  of 
profit  on  each  sale,  the  middleman  secures  more 
frequent  turnovers  due  to  the  selling  efforts  of  the 
merchant-producer.  But  the  middleman  is  often 
slow  to  see  this  compensating  feature.  He  usually 
resists  any  attempt  to  reduce  his  discount  because 
the  producer  has  taken  over  the  selling  function. 
If  his  compensation  per  sale  is  reduced  he  may 
refuse  to  handle  the  article.  It  is  fair  to  say, 
however,  that  many  wholesalers  and  retailers  appre- 
ciate the  possibilities  of  more  rapid  turnover  of 
stocks  and  are  adjusting  themselves  to  the  changed 
conditions. 

Now  if  the  producer  takes  over  the  selling  func- 
tion and  does  not  reduce  the  discounts  allowed 
the  middleman,  the  middleman  is  being  paid  for  a 
function  he  no  longer  exercises.  And  ultimately 

85 


MARKET  DISTRIBUTION 

this  must  come  out  of  the  pockets  of  the  consumer. 
He  is  compelled  to  pay  twice  over  for  the  exercise 
of  a  single  function. 

The  opposition  of  middlemen  to  reduced  com- 
pensation when  their  functions  are  taken  over  pre- 
sents a  difficult  problem  to  the  producer.  Often 
the  producer  postpones  taking  over  the  function  of 
selling  by  direct  communication  of  ideas  to  the 
consumer  because  he  sees  that  he  must  continue 
to  allow  the  middleman  compensation  for  that 
function  if  he  is  to  continue  to  use  the  middleman 
for  the  physical  distribution  of  the  goods.  Some- 
times the  producer  chooses  to  establish  branch 
stores  and  so  eliminate  all  middlemen  from  his 
system  of  distribution.  This,  however,  is  gener- 
ally possible  only  in  large  centers  of  population  and 
applicable  only  to  certain  classes  of  goods.  The 
system  of  distribution  through  branch  stores  is 
illustrated  in  its  application  by  certain  large 
producers  of  trade-marked  shoes. 

It  is,  however,  feasible  in  many  lines  of  trade- 
marked  goods  to  take  over  the  assorting,  assem- 
bling, and  re-shipping  function  of  the  wholesaler 
rather  than  to  continue  to  compensate  him  for 
the  selling  function  no  longer  performed.  For 
example,  one  large  paint  manufacturer,  who  stim- 
ulates a  demand  for  his  branded  paints  and  var- 
nishes largely  by  direct  communication  of  ideas 
about  the  goods  to  the  consumer  and  to  the  retail 

86 


METHODS  OF  DISTRIBUTION 

paint  dealer,  found  it  desirable  to  eliminate  the 
wholesaler  from  his  scheme  of  distribution.  He 
finds  in  branch  houses  certain  marked  advantages. 
(1)  He  is  able  to  obtain  the  entire  time  of  trained 
men,  devoted  solely  to  the  handling  of  his  prod- 
ucts. (2)  He  obtains  a  direct  contact  with  the 
retail  dealer,  who  he  finds  prefers  on  the  whole  to 
buy  directly  from  the  manufacturer.  (3)  He  is 
enabled  to  carry  larger  and  better  assorted  stocks 
than  the  wholesaler  would  be  willing  to  carry.  (4) 
In  his  experience  the  credit  losses  are  less  when  the 
wholesaler  is  eliminated.  (5)  He  maintains  better 
control  of  general  policy  and  prices.  The  larger 
capital  required  for  a  system  of  branch  houses  is 
an  objection  of  decreasing  importance  owing  to 
the  rapid  increase  in  the  available  capital  fund  and 
its  greater  fluidity.  And  the  increased  need  of  man- 
agerial ability  is  being  met  by  improved  systems 
of  training  men  for  managerial  responsibilities. 

This  rather  lengthy  analysis  of  the  position  and 
functions  of  the  middleman  in  distribution  is  still 
incomplete.  Factors  not  of  an  economic  character 
enter.  The  business  man  seldom  faces  a  problem 
on  purely  economic  grounds.  There  is  always  a 
human  element  to  be  considered,  arising  from  the 
character  of  transactions  as  they  exist  in  actual 
commercial  life.  One  does  not  buy  of  a  dealer 
solely  upon  narrow  economic  grounds.  Social  and 
personal  considerations  play  their  part.  Hence, 

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MARKET  DISTRIBUTION 

when  the  business  man  considers  the  position  of 
the  middleman  in  his  own  scheme  of  distribution, 
his  problem  is  complex.  Its  solution  is  likely  to  be 
found  in  the  rise  of  a  class  of  efficient  and  progres- 
sive middlemen  who  will  take  advantage  of  the 
producer's  selling  efforts  by  effecting  more  rapid 
turnover  of  stock,  and  will  provide  the  necessary 
physical  distribution  of  the  goods  at  a  reduced 
percentage  of  profit  on  the  unit  sale  but  with  an 
increased  profit  on  the  greater  volume  of  merchan- 
dise passing  through  his  hands. 

THE  PBODUCEB'S  SALESMAN  IN  DEMAND  CREATION 

A  less  detailed  analysis  than  was  necessary  in 
the  case  of  the  middleman  will  be  required  for  the 
salesman.  The  primary  function  for  which  sales- 
men are  used  is  the  communication  of  ideas  about 
the  goods  to  the  prospective  purchaser;  that  is  the 
selling  function. 

The  salesman,  in  the  sense  of  a  man  sent  to  pro- 
spective purchasers,  generally  sells  from  sample.  In 
some  few  cases  the  sale  may  be  in  bulk,  the  sales- 
man showing  the  prospective  purchaser  the  actual 
goods  to  be  purchased.  And  as  has  been  suggested, 
the  salesman  may  sell  entirely  by  description, 
merely  showing  the  prospective  purchaser  pictures 
of  the  goods,  as  in  selling  from  catalogue. 

When  the  producer  finds  it  desirable  to  go 
around  a  middleman  and  to  sell  directly  to  a  sub- 

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METHODS  OF  DISTRIBUTION 

sequent  middleman  or  to  the  consumer,  he  may 
use  for  the  selling  function  either  his  own  salesmen 
or  advertising,  or  the  two  in  combination. 

When  one  considers  the  salesman  as  an  agency 
for  sale  by  description  in  contrast  with  advertising, 
direct  or  general,  one  must  take  into  account  the 
human  element  again.  Advertising  has  the  ob- 
vious advantage  that  you  can  convey  exactly  the 
idea  you  wish  to  convey  in  the  form  you  wish  to 
convey  it.  It  lacks,  however,  the  personality  and 
the  timeliness  of  the  salesman's  visit;  it  lacks 
adaptability,  the  opportunity  to  use  the  mood  of 
the  customer  and  all  the  various  human  factors 
that  add  to  the  salesman's  effectiveness. 

More  than  this,  when  the  salesman  has  aroused 
in  the  prospective  purchaser  a  demand  for  the 
goods  in  question,  he  is  on  the  ground  to  close  the 
sale  at  once.  In  the  case  of  advertising,  the  de- 
mand aroused  must,  in  general,  be  strong  enough 
to  lead  the  prospective  purchaser  to  go  to  some 
trouble  before  he  obtains  the  actual  goods.  Hence 
a  less  intensive  demand  may  be  more  immediately 
effective  in  the  case  of  the  salesman  than  when 
advertising  is  concerned. 

It  should  here  be  emphasized  that  the  analogy 
between  direct  salesmen  and  advertising  is  very 
close.  Each  agency  is  largely  used  to  enable  the 
producer  to  take  over  one  function  of  the  middle- 
man, that  is,  the  selling  function.  And  in  each 

89 


MARKET  DISTRIBUTION 

case  the  root  idea  is  the  same.  The  producer 
seeks  to  communicate  to  the  prospective  purchaser 
through  one  or  the  other  agency,  or  a  combination 
of  the  two,  such  ideas  about  the  goods  as  will 
create  a  conscious  demand  for  them.  The  direct 
salesman  and  advertising  are  different  modes  of 
accomplishing  the  same  end. 

ADVERTISING  AS  AN  AGENCY  IN  DISTRIBUTION 

Advertising  in  the  modern  commercial  sense  is 
of  comparatively  recent  development.  Only  in 
the  middle  of  the  nineteenth  century  did  it  com- 
mence to  be  of  real  importance  in  the  commercial 
world.  And  as  in  its  early  extensive  use  the  sale  of 
proprietary  medicines  of  doubtful  value  predomi- 
nated, it  was  held  at  first  in  somewhat  bad  repute 
as  an  agency  in  demand  creation.  This  notion 
lingers  among  many  economists,  who  are  satisfied 
casually  to  condemn  advertising  under  the  name 
"  puffing,"  and  who  fail  fairly  to  analyze  its  posi- 
tion as  an  agency  in  our  scheme  of  distribution. 

That  there  are  evils  and  abuses  in  connection 
with  advertising  today  may  be  frankly  admitted. 
It  is  a  new  economic  agency,  and  ignorance  of  its 
true  function  causes  wasteful  use.  Moreover  it 
lends  itself  to  conscious  misuse.  So  the  factory 
system  carried  with  it  evils  which  were  far  greater 
a  century  ago  than  today.  And  just  as  the  factory 
system,  by  gathering  together  large  bodies  of 

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METHODS  OF  DISTRIBUTION 

workers,  drew  attention  to  evils  which  existed  un- 
noticed under  the  domestic  system  of  manufacture, 
so  advertising  tends  to  bring  into  the  lime-light  of 
publicity  certain  evils  which  existed  as  well  in  sale 
through  other  channels.  But  these  are  rather 
undesirable  and  non-essential  incidents  than  any- 
thing fundamental  to  the  thing  itself.  The  evils 
must  be  recognized  and  combated,  but  should  not 
cloud  the  fact  that  advertising  is  today  an  element 
of  tremendous  importance  in  our  economic  organi- 
zation. The  steady  and  remarkable  increase  in 
advertising  evidences  its  efficiency  as  a  selling 
force.  In  the  United  States  we  are  expending 
annually  upon  advertising,  in  its  inclusive  sense, 
not  less  than  a  billion  dollars.  This  is  a  cold 
economic  fact  which  renders  advertising  worthy 
of  serious  analysis. 

Advertising  is  a  necessary  consequence  of  sale 
by  description.  It  has  been  pointed  out  that  so 
long  as  the  prevailing  code  of  commercial  ethics 
made  sale  in  bulk  the  only  practical  method,  the 
middleman  was  an  indispensable  selling  agency. 
As  business  morals  bettered  and  manufacturing 
methods  improved  so  that  a  standardized  product 
could  be  turned  out,  sale  by  sample  appeared. 
Then  it  became  possible  for  the  producer  to  send 
his  own  salesmen  with  a  sample  to  the  prospective 
purchaser  instead  of  being  dependent  solely  upon 
the  selling  efforts  of  a  middleman.  And  then, 

91 


MARKET  DISTRIBUTION 

when  sale  by  description  appeared,  with  an  even 
higher  code  and  a  higher  level  of  general  intelli- 
gence, a  third  selling  agency  became  possible. 

In  advertising,  as  in  selling  through  salesmen, 
the  producer  communicates  ideas  about  the  goods 
to  the  prospective  buyer  to  create  in  him  a  de- 
mand for  the  goods.  While  the  purchaser  insisted 
that  he  see  the  actual  goods  before  purchasing, 
sale  by  advertising  was  impracticable.  While  he 
still  required  to  be  shown  a  sample  of  the  goods, 
advertising  was  not  in  most  cases  feasible.  But 
now  that  the  general  average  of  intelligence  en- 
ables the  prospective  purchaser  to  gain  an  idea  of 
the  goods  without  seeing  them  and  without  seeing 
a  sample,  and  now  that  the  prevailing  code  of 
business  ethics  is  such  that  the  prospective  buyer 
feels  that  he  may  rely  upon  the  description  given 
him,  advertising  becomes  in  many  lines  the  most 
economical  agency  for  the  exercise  of  the  selling 
function.  Even  where  the  actual  sale  is  made  by 
salesmen  from  sample,  advertising  is  used  as  a 
supplementary  agency  to  build  up  a  demand  which 
the  salesman  crystallizes.  And  sale  by  advertis- 
ing alone  may  be  applied  today  even  where  the 
purchaser  demands  to  see  the  goods  before  con- 
cluding the  purchase,  by  sending  the  goods  to  him 
on  approval. 

Not  only  is  the  modern  development  of  adver- 
tising dependent  upon  the  possibility  of  sale  by 

92 


METHODS  OF  DISTRIBUTION 

description,  but  it  also  depends  upon  the  increas- 
ing differentiation  of  commodities  by  trade  marks, 
brands,  and  trade  names.  As  before  suggested, 
the  producer  cannot  profitably  convey  to  the  con- 
sumer ideas  about  a  certain  food  product  which 
will  build  up  a  demand  for  that  product,  unless  the 
consumer  is  able  to  identify  the  particular  product 
when  he  goes  into  the  grocery  store  to  purchase  it. 

Advertising,  then,  may  properly  be  regarded 
either  as  a  substitute  for  middlemen  and  salesmen 
or  as  auxiliary  to  them  in  the  exercise  of  the  selling 
function.  Owing  to  the  rise  of  sale  by  description 
and  the  increasing  differentiation  of  commodities, 
it  tends  to  displace  in  whole  or  in  part  these  other 
agencies  in  many  lines  of  distribution  because  it  is 
a  more  economical  and  efficient  means  of  com- 
municating ideas  about  the  goods  to  the  consumer. 

Advertising,  in  the  sense  here  used,  may  be  de- 
fined as  the  communication  to  possible  purchasers 
by  written  or  printed  symbols  of  ideas  about  the 
goods,  designed  to  create  a  demand  for  the  goods. 
In  this  broad  sense  it  includes  not  only  selling  let- 
ters and  circulars,  but  newspaper  and  periodical 
advertising,  bill-boards  and  window  cards,  electric 
signs,  street-car  advertising,  catalogues  and  all  the 
varied  forms  of  modern  commercial  publicity.  A 
rough  classification  is  made  between  general  and 
direct  advertising.  General  advertising  includes 
newspaper  and  magazine  advertising,  bill-boards, 

93 


MARKET  DISTRIBUTION 

electric  signs,  street-car  advertising  and  the  like, 
aimed  at  the  general  public  or  some  section  of  it. 
Direct  advertising  is  used  in  reference  to  the  send- 
ing of  selling  letters,  circulars,  or  catalogues  to  the 
persons  whose  names  appear  on  a  mailing  list  and 
to  influence  whom  the  material  sent  is  specially 
adapted.  This  classification  is  of  some  importance 
in  discussing  advertising  as  an  agency  in  distri- 
bution. 

We  cannot  here  attempt  an  adequate  discussion 
of  modern  advertising  in  its  varied  phases.  And 
it  is  perhaps  not  necessary,  so  much  is  it  today 
forced  upon  the  attention  of  each  of  us.  To  realize 
the  machinery  now  provided  for  the  direct  com- 
munication of  ideas  about  goods,  one  has  but  to 
consider  that  a  single  publishing  company  today 
reaches  through  two  magazines  about  three  and 
three-quarters  million  families;  that  there  were  in 
this  country  in  1911,  according  to  the  Statistical 
Abstract,  22,806  newspapers  and  periodicals.  A 
fair  measure  of  the  development  of  advertising  in 
recent  years  is  found  in  the  rapid  progress  of  in- 
ventions to  facilitate  advertising,  —  photography, 
the  half-tone  process  of  reproducing  photographs 
and  drawings,  the  three-color  processes  for  more 
exact  and  convincing  reproduction,  the  cheapening 
and  perfecting  of  papers,  inks,  and  printing. 

Advertising  is  now  being  extended  to  fields 
where  its  use  not  many  years  ago  was  undreamed 

94 


METHODS  OF  DISTRIBUTION 

of.  Ten  years  ago  an  advertising  man  would  have 
said  it  was  impractical  to  advertise  papers;  today 
enormous  sums  are  expended  on  general  advertis- 
ing of  papers  for  writing  and  printing.  Advertising 
is  even  used  today  in  fields  other  than  commercial 
distribution.  The  railroads  annually  buy  large 
quantities  of  newspaper  space  in  which  to  present 
facts  which  will  help  the  public  to  a  better  under- 
standing of  their  situation,  their  attitude  and  their 
needs  and  thus  forestall  possible  adverse  legisla- 
tion. And  advertising  by  the  railroads  to  secure 
passenger  and  freight  traffic  has  reached  enormous 
proportions. 

It  is  necessary  to  include  in  this  hasty  and  in- 
complete analysis  of  advertising  as  an  agency  in 
distribution  a  reference  to  the  character  of  the 
demand  aroused  by  advertising.  Advertising 
may  be  said  to  build  up  three  general  classes  of 
demand:  (1)  expressed  conscious  demand,  (2) 
unexpressed  conscious  demand,  and  (3)  subcon- 
scious demand. 

The  three  classes  may  be  illustrated  by  suppos- 
ing a  product  for  sale  by  grocers  to  be  advertised 
in  a  periodical  of  large  circulation  by  a  double  page 
costing  for  one  insertion  $8,000.  If  as  a  result  of 
the  advertisement  30,000  people  go  to  the  grocery 
and  buy  the  product,  60,000  plan  to  purchase  the 
product  at  some  future  time  when  such  an  article 
is  needed,  and  100,000  more  become  open  to  a 

95 


MARKET  DISTRIBUTION 

further  exciting  force,  such  as  seeing  the  product 
at  the  grocery  and  recognizing  it  as  one  advertised, 
then  we  should  call  the  30,000  the  expressed  con- 
scious demand,  the  60,000  the  unexpressed  con- 
scious demand,  and  the  100,000  the  subconscious 
demand  resulting  from  the  advertisement.  Ex- 
pressed conscious  demand  means  present  sales; 
unexpressed  conscious  demand  means  future  sales; 
subconscious  demand  means  that  the  field  has  been 
fertilized  so  that  future  selling  efforts  will  be  more 
fruitful.  Unexpressed  conscious  demand  and 
subconscious  demand  are  difficult  of  measure  but 
must  always  be  taken  into  account  in  any  consider- 
ation of  the  efficiency  of  advertising  as  a  selling 
agency. 

PURPOSE  OF  FOREGOING  ANALYSIS 

What  has  gone  before  has  been  by  way  of 
analysis.  The  general  problem  of  distribution,  the 
present  day  differentiation  of  products,  the  price 
policies  open  to  the  producer,  the  methods  of  sale, 
and  the  three  chief  selling  agencies  have  all  been 
subjected  to  hasty  review.  This  has  been  rendered 
necessary  by  the  fact  that  neither  economists 
nor  business  men  have  previously  made  such  an 
analysis. 

Though  what  follows  is  by  way  of  practical  sug- 
gestion to  the  business  man,  the  social  significance 
of  the  problem  must  not  be  forgotten.  While  a 

96 


METHODS  OF  DISTRIBUTION 

more  systematic  handling  of  distribution  problems 
means  to  the  business  man  business  success,  a 
better  organization  of  distribution  means  to  society 
the  prevention  of  an  enormous  annual  waste.  It 
is  not  alone  that  a  considerable  part  of  the  billion 
dollars  annually  expended  on  advertising  is  wasted, 
that  expenditures  are  often  unwarranted  and  ill- 
directed,  and  that  the  distributor  often  fails  to  take 
advantage  of  the  demand  aroused  by  making  the 
goods  physically  available  at  the  time  and  place 
they  are  wanted,  but  also  that  our  cumbersome 
and  chaotic  system  of  distribution  adds  materially 
to  the  cost  of  goods  to  the  consumer.  It  is  to  the 
costly  and  awkward  machinery  of  distribution 
that  the  Tariff  Board  refers  in  its  Summary  of  the 
Report  on  the  Cotton  Schedule,  submitted  to  the 
President  of  the  United  States,  March  22,  1912:- 

"  On  account  of  more  costly  methods  of  distri- 
bution in  this  country  from  producer  to  consumer, 
the  latter  pays  a  decidedly  higher  retail  price  than 
the  European  consumer,  even  in  the  case  of  fabrics 
on  which  the  cost  of  production  and  the  mill  price 
are  as  low  here  as  there." 

Nor  is  the  social  importance  of  improvements  in 
distribution  a  matter  merely  of  reducing  the  cost  of 
products  to  the  consumer.  Our  ill-organized  sys- 
tem of  distribution  means  that  the  consumer  is  not 
able  readily  and  accurately  to  satisfy  his  needs. 
And  this  unfortunate  condition  is  not  inevitable. 

97 


MARKET  DISTRIBUTION 

While  it  is  true  that  up  to  this  time  the  facts  of 
distribution  have  not  been  gathered,  described, 
and  classified  in  such  a  way  as  fully  to  indicate  ten- 
dencies and  underlying  principles,  yet  the  way  is 
open  to  a  better  organization.  The  business  man 
must  apply  to  the  problems  of  distribution  methods 
of  systematic  study  that  have  been  successful  in 
other  fields  of  human  knowledge.  There  is  an 
increasing  need  of  scientific  research  methods  in 
business.  As  business  becomes  more  highly  inte- 
grated, mere  intuition  must  play  a  smaller  part, 
and  a  scientific  approach  to  the  problems  arising  is 
demanded.  And  a  scientific  approach  to  the  prob- 
lems of  distribution  is  feasible. 

The  ordinary  business  man  today  markets  his 
product  by  rule  of  thumb.  He  gambles  on  his 
business  instinct.  The  success  or  failure  of  a 
selling  campaign  is  almost  his  sole  source  of  knowl- 
edge as  to  whether  his  business  instinct  was  a  safe 
guide.  If  his  past  experience  with  other  commodi- 
ties has  indicated  that  one  agency  or  another  of 
selling  is  more  efficient,  then  he  will  adopt  that 
agency  for  commodities  which  he  subsequently 
attempts  to  market.  If  he  compares  the  different 
agencies,  it  is  through  the  average  cost  of  selling 
by  one  or  another  agency.  Thus  if  he  finds  over 
a  short  period  that  the  average  cost  of  selling  a 
product  through  middlemen  is  less  than  the  aver- 
age cost  of  selling  it  through  salesmen  and  adver- 


METHODS  OF  DISTRIBUTION 

tising,  he  relies  solely  upon  the  former  method. 
He  does  not  wait  to  analyze  the  market  as  a  basis 
for  his  consideration  of  the  most  economical 
agency.  As  an  advocate  of  one  particular  method 
of  selling,  he  does  not  always  realize  that  an  agency 
which  is  most  economical  for  distribution  in  one 
section  or  stratum  of  the  market  may  not  be  so  in 
another.  And  least  of  all  does  he  systematically 
test  the  ideas  to  be  conveyed,  and  the  very  forms 
of  expression,  that  are  the  basis  of  his  selling 
efforts. 


99 


CHAPTER  IV 
CONSIDERATIONS  OF  THE  MARKET 

THE  business  man  must  first  realize  the  intricacy 
of  the  problems  he  has  to  solve.  He  must  analyze 
his  market.  Enough  has  been  said  to  indicate  the 
complexity  of  the  market  problem.  The  business 
man  faces  a  body  of  possible  purchasers,  widely  dis- 
tributed geographically,  and  showing  wide  ex- 
tremes of  purchasing  power  and  felt  needs.  The 
effective  demand  of  the  individual  consumer  de- 
pends not  alone  upon  his  purchasing  power  but 
also  upon  his  needs,  conscious  or  latent,  resulting 
from  his  education,  character,  habits,  and  economic 
and  social  environment.  The  market,  therefore, 
splits  up  into  economic  and  social  strata,  as  well 
as  into  geographic  sections. 

The  producer  cannot  disregard  the  geographic 
distribution  of  the  consuming  public.  He  may  be 
able  to  sell  profitably  by  salesmen  where  the  popu- 
lation is  dense,  while  such  method  of  sale  would  be 
unprofitable  in  a  region  where  there  is  a  sparse 
population.  If  he  bases  a  judgment  upon  the 
average  cost  of  selling  by  salesmen  for  the  whole 
market,  he  may  easily  go  wrong,  since  the  average 
might  show  that  the  use  of  such  an  agency  was  on 

100 


THE  MARKET 

the  whole  profitable,  although  in  some  sections 
entering  into  the  calculations  the  use  of  salesmen 
was  actually  unprofitable.  Again,  it  might  be  eco- 
nomical for  the  distributor  to  establish  his  own 
branch  stores  in  the  denser  urban  centers,  while 
in  the  sparsely  populated  regions  he  could  most 
profitably  distribute  his  product  through  the 
regular  channels. 

If,  then,  a  sound  system  of  distribution  is  to  be 
established,  the  business  man  must  realize  that 
each  distinct  geographic  section  is  a  separate  prob- 
lem. The  whole  market  breaks  up  into  differing 
regions. 

Equally  important  is  a  realization  of  what  may 
be  termed  the  market  contour.  The  market,  for 
the  purposes  of  the  distributor,  is  not  a  level  plain. 
It  is  composed  of  differing  economic  and  social 
strata.  Seldom  does  the  ordinary  business  man 
appreciate  the  market  contour  in  reference  to  his 
product.  Yet  obviously  the  success  of  the  pro- 
ducers of  trade-marked  hats  depends  upon  a 
realization  of  this  element  of  market  contour. 
The  distributor  of  a  staple  hat  at  $3.00  appeals  to 
different  economic  and  social  strata,  faces  different 
considerations,  and  finds  different  selling  methods 
necessary,  as  compared  with  distributors  selling  a 
$5.00  trade-marked  hat,  or  those  distributors  sell- 
ing $4.00  or  $6.00  trade-marked  hats.  Differences 
in  economic  and  social  strata  to  be  reached  are  as 

101 


MARKET  DISTRIBUTION 

important  as  differences  in  geographic  location  and 
density,  if  a  sound  system  of  distribution  is  to  be 
worked  out. 

Take  the  distributor  who  seeks  to  map  out  a 
selling  campaign  for  a  Catholic  publication.  It  is 
essential  that  he  take  into  account  not  merely  the 
geographic  distribution  of  the  Catholic  population 
in  the  United  States,  the  regions  where  it  is  rela- 
tively dense,  and  the  regions  where  it  constitutes  a 
small  element  in  the  population,  but  also  he  must 
take  into  account  the  distribution  of  that  popula- 
tion through  the  economic  strata  of  society.  A 
method  of  distribution  successful  in  New  Orleans, 
where  the  Catholic  population  is  dense  and  spread 
through  all  economic  strata  of  society,  might  well 
fail  if  applied  in  Maine,  where  the  Catholic  popu- 
lation is  relatively  sparse  and  found  mostly  in  the 
lower  economic  strata. 

A  careful  analysis  of  his  market,  then,  by  areas 
and  by  strata,  is  the  first  task  of  the  modern  dis- 
tributor. 

CHOICE  OF  AGENCIES  IN  DISTRIBUTION 

Nor  does  the  merchant-producer  ordinarily 
realize  how  intricate  is  his  problem  as  to  the 
agency  or  combination  of  agencies  that  will  be 
most  efficient  in  reaching  his  market.  As  has  been 
suggested  above,  the  business  man  often  adopts 
one  method  and  becomes  an  advocate  of  it,  dis- 

102 


THE  MARKET 

regarding  entirely  other  methods.  While  the 
method  adopted  may  be  more  efficient  than  any 
other  single  method,  it  is  apparent  that  a  method 
which  is  relatively  efficient  in  reaching  one  area 
may  be  inferior  to  another  method  in  reaching 
another  area.  And  so  a  system  of  distribution 
which  has  proved  very  effective  in  reaching  one 
economic  stratum  may  be  relatively  inefficient 
when  employed  to  reach  a  different  economic 
stratum  in  society. 

The  problem,  then,  of  working  out  the  most 
effective  combination  of  agencies  is  a  most  com- 
plicated one.  Each  distinct  area  and  economic 
stratum  must  be  treated  as  a  separate  problem, 
and,  moreover,  the  economic  generalizations  em- 
bodied in  the  law  of  diminishing  returns  must  be 
taken  into  account  in  choosing  that  combination  of 
selling  agencies  which  will  give,  in  the  aggregate, 
the  most  efficient  organization  of  the  market. 

Thus  the  distributor  may  find  as  he  extends  his 
operations  in  his  immediate  territory,  geographi- 
cally, that  his  selling  cost  steadily  decreases,  but 
that  when  he  further  extends  his  market  the  selling 
cost  increases.  He  may  find  that  in  more  distant 
areas  selling  by  salesmen  ceases  to  be  profitable, 
and  there  he  will  perhaps  establish  a  more  economi- 
cal system  of  selling  by  a  combination  of  salesmen 
and  circular  letters.  That  is,  he  may  reduce  the 
number  of  visits  by  salesmen  by  one-half,  and 

103 


MARKET  DISTRIBUTION 

supplement  their  efforts  by  a  series  of  circular 
letters  or  more  personal  correspondence.  In  even 
more  distant  areas,  it  may  be  necessary  to  eliminate 
the  salesmen  entirely  and  to  sell  only  by  direct 
advertising. 

Perhaps  enough  has  been  said  above,  in  analyz- 
ing the  functions  of  the  middleman  and  the  extent 
to  which  the  rise  of  functional  middlemen  has  made 
alternative  agencies  of  distribution  possible,  to  free 
us  from  the  necessity  of  here  pointing  out  at  length 
how  complicated  is  the  problem  presented  when  the 
business  man  balances  distribution  through  middle- 
men against  direct  selling  through  salesmen  and 
advertising. 

Attention  must  be  called,  however,  to  considera- 
tions that  enter  when  one  compares  the  use  of 
salesmen  with  the  use  of  different  forms  of  adver- 
tising. The  business  man  will  often  judge  between 
different  selling  agencies  solely  upon  the  basis  of  the 
direct  return  over  a  short  period.  In  discussing 
advertising  we  spoke  of  three  classes  of  demand 
aroused  by  selling  effort:  (1)  expressed  conscious 
demand,  (2)  unexpressed  conscious  demand,  and 
(3)  subconscious  demand.  The  direct  and  immedi- 
ate return  from  selling  efforts  depends  solely  on 
expressed  conscious  demand.  But  the  business 
man  must  take  into  account  the  unexpressed 
conscious  demand  and  the  subconscious  demand. 
Suppose  a  smoking  tobacco  is  advertised.  A  man 

104 


THE  MARKET 

notices  the  advertisement,  reads  it,  and  decides 
that  at  some  future  time  he  will  try  it,  and  perhaps 
months  later  does  so.  This  is  not  reflected  in  the 
direct  immediate  returns,  yet  clearly  it  is  a  result  to 
be  taken  into  account.  Or  suppose  a  man  merely 
notices  the  advertisement.  At  a  later  date  when 
purchasing  tobacco,  he  is  shown  the  advertised 
brand  with  other  brands.  The  advertised  brand 
being  vaguely  familiar  to  him  from  the  advertise- 
ment, he  purchases  it  in  preference  to  the  others. 
Here,  too,  the  aroused  demand  would  be  of  a  degree 
not  reflected  in  direct  immediate  returns,  yet  of 
value  to  the  distributor. 

It  is  obvious,  then,  that  if  one  were  balancing 
the  advantages  of  selling  through  salesmen  against 
selling  through  advertising  in  whole  or  in  part,  he 
should  consider  not  only  the  expressed  conscious 
demand  reflected  in  the  direct  immediate  returns 
but  also  the  lesser  degrees  of  demand  which,  while 
not  immediately  effective,  tend  to  render  subse- 
quent selling  easier. 

Thus  a  salesman  might  make  fifty  calls  at  an 
expense  of  $100,  and  ten  sales  might  result  from  his 
efforts.  Or  for  the  same  $100,  5000  pieces  of  direct 
advertising  might  be  mailed,  resulting  perhaps  in 
only  eight  sales.  Or,  perhaps,  if  the  same  $100 
were  used  for  the  insertion  of  a  page  advertise- 
ment in  100,000  of  the  circulation  of  a  standard 
magazine,  only  six  sales  would  result.  Now  it  is 

105 


MARKET  DISTRIBUTION 

apparent  that  judging  by  the  direct  results,  the 
salesman  is  the  most  efficient  agency  of  distribu- 
tion, the  direct  advertising  next,  and  the  magazine 
advertising  least  efficient.  But  the  distributor 
must  bear  in  mind  that  there  are  grades  of  demand 
which  do  not  become  effective  immediately,  and 
must  take  into  account  that  while  the  salesman 
made  ten  sales  he  had  only  forty  opportunities  to 
create  these  lesser  grades  of  demand,  while  the 
direct  advertising  gave  4,992  opportunities  for  the 
creation  of  demand  falling  short  of  expression,  and 
the  magazine  advertising,  perhaps,  49,994  such 
opportunities,  assuming  for  our  present  purpose 
that  the  advertisement  was  seen  in  one  half  the 
copies  by  one  person.  This  is  not  an  improbable 
supposition  as  each  copy  of  a  magazine  is  usually 
read  by  several  persons. 

A  sound  selling  policy,  then,  must  be  built  up  on 
a  careful  analysis  of  the  market  by  areas  and  strata, 
and  upon  a  detailed  study  of  the  proper  agency  or 
combination  of  agencies  to  reach  each  area  and 
stratum,  taking  into  account  always  the  economic 
generalizations  expressed  in  the  law  of  diminishing 
returns.  It  must  also  take  into  account  not  only 
the  direct  results  obtained  from  the  use  of  one  or 
the  other  agency  over  a  short  period,  but  also  the 
less  measurable  results  represented  by  the  unex- 
pressed conscious  demand  and  subconscious  de- 
mand, which  go  to  aid  future  selling  campaigns. 

106 


THE  MARKET 

All  this  tends  rather  to  give  a  general  sense  of 
direction  than  to  serve  as  a  practical  and  tangible 
method  of  handling  a  specific  problem  of  distribu- 
tion. A  clear  grasp  of  the  problem  through  a 
careful  analysis  is  the  first  step  in  solving  difficul- 
ties. To  suggest  any  cure-all  or  even  any  panacea 
for  the  existing  mal-adjustments  in  distribution, 
even  were  it  possible,  is  not  the  purpose  of  this 
paper.  The  very  complications  revealed  by  analy- 
sis indicate  the  inadequacy  of  any  single  remedy. 
But  it  is  possible  to  face  the  problem  of  remedy  as 
well  as  of  diagnosis  in  a  scientific  spirit, — to  intro- 
duce what  maybe  termed  the  "laboratory method." 

LABORATORY  STUDY  OF  DISTRIBUTION 

The  crux  of  the  distribution  problem  is  the  proper 
exercise  of  the  selling  function.  The  business  man 
must  convey  to  possible  purchasers  through  one 
agency  or  another  such  ideas  about  the  product 
as  will  create  a  maximum  demand  for  it.  This  is 
the  fundamental  aim,  whatever  the  agency  em- 
ployed. Hence  this  is  the  point  where  a  scientific 
study  of  distribution  must  first  be  applied.  How  is 
the  business  man  to  determine  what  ideas  are  to  be 
conveyed  to  the  possible  purchaser  and  what  form 
of  expression  is  best  adapted  to  such  conveyance  ? 

Here,  as  elsewhere  in  distribution,  the  ordinary 
business  man  is  today  working  by  rule  of  thumb. 
He  guesses  at  the  suitable  ideas  and  forms  of  expres- 

107 


MARKET  DISTRIBUTION 

sion,  and  gambles  on  his  guess.  On  the  basis  of  his 
a  priori  selection  of  ideas  fitted  to  build  up  a 
demand  for  his  product  and  of  a  form  of  expression 
suited  to  convey  the  ideas  effectively,  he  invests 
tens  even  hundreds  of  thousands  of  dollars  in  a 
selling  campaign. 

The  more  able  business  men,  to  be  sure,  seek  to 
determine  those  facts  about  their  goods  that  will 
attract  the  attention  of  the  possible  purchaser  and 
awaken  in  him  the  desired  reaction,  that  is,  a 
desire  for  the  article.  They  study  in  a  general 
way  the  points  of  superiority  in  quality  and  service 
possessed  by  their  products  as  compared  with  other 
goods  of  like  kind. 

They  also  seek  guides  as  to  the  form  in  which  the 
ideas  should  be  conveyed,  in  the  general  principles 
of  style,  all  based  on  the  fundamental  notion  of  con- 
serving the  prospective  purchaser's  mental  energy 
by  cutting  down  the  friction  of  communication. 
They  know,  for  instance,  that  they  should  use 
short  familiar  words  expressing  their  exact  shade  of 
meaning;  that  they  should  give  preference  to 
figurative  language;  that  they  should  suggest  a 
concrete  image  only  after  the  materials  of  which 
it  is  to  be  made  are  conveyed;  that  they  should 
avoid  abstractions  and  generalizations  where  pos- 
sible; that  when  they  are  suggesting  the  reaction 
desired  their  language  should  become  quick,  sharp, 
and  compelling. 

108 


THE  MARKET 

These  things  the  more  efficient  business  men 
know  and  apply.  But  all  this  is  a  priori.  The  need 
is  for  a  method  of  practical  test  that  will  enable  us  to 
try  out  selling  ideas  and  forms  of  expression,  under 
laboratory  conditions,  as  it  were,  before  the  invest- 
ment of  thousands  and  hundreds  of  thousands  of  dol- 
lars is  staked  on  the  success  of  the  selling  campaign. 

Mention  has  been  made  of  the  annual  expendi- 
ture of  not  less  than  a  billion  dollars  in  advertising. 
Unquestionably  an  extremely  large  percentage  of 
this  is  wasted.  This  means  not  merely  individual 
loss,  but  social  loss.  It  is  a  diversion  of  capital  and 
productive  energy  into  unprofitable  channels. 

The  causes  of  this  waste  are  numerous.  The 
commodity  in  question  may  be  one  not  possessing 
those  elements  of  quality  and  service  which  con- 
stitute the  basis  for  a  demand  on  the  part  of  the 
consuming  public.  If  the  goods  advertised  are  not 
adapted  to  satisfy  a  need,  conscious  or  subcon- 
scious, of  consumers,  the  advertising  cannot  be 
effective.  Attempting  to  sell  a  thing  that  nobody 
needs  is  wasted  effort. 

Again,  the  medium  used  for  the  communication 
of  the  ideas  about  the  goods  may  not  be  one  that 
reaches  the  particular  economic  or  social  stratum 
in  which  possible  purchasers  of  the  commodity  lie. 
Hence  the  ideas  fail  to  create  a  demand  because 
they  do  not  reach  those  in  whom  a  latent  need  for 
the  commodity  exists. 

109 


MARKET  DISTRIBUTION 

Another  important  cause  of  advertising  waste  lies 
in  the  failure  to  take  advantage  of  aroused  demand. 
The  distributor  often  fails  to  give  proper  attention 
to  the  matter  of  the  physical  supply  of  his  product. 
There  results  a  considerable  leakage  in  demand 
from  the  inability  of  persons  in  whom  a  demand 
has  been  created  to  obtain  the  goods  at  the  time 
when  desired. 

But  the  great  cause  of  waste  is  probably  the  fact 
that  the  ideas  about  the  goods,  or  the  form  in 
which  those  ideas  are  conveyed  to  possible  pur- 
chasers, prove  ill-adapted  to  secure  the  desired 
reaction,  and  thus  to  create  in  the  consumer  an 
effective  demand. 

If  we  can  apply  to  this  pressing  problem  of 
advertising  waste  methods  of  study  which  have 
proven  efficient  in  other  fields,  the  gain  is  clear. 
The  engineer  does  not  choose  material  for  a  bridge 
by  building  a  bridge  of  the  material  and  waiting  to 
see  whether  it  stands.  He  first  tests  the  material 
in  the  laboratory.  That  is  what  the  business  man 
must  do. 

The  statistician  turns  in  his  problems  to  the  law 
of  averages.  He  is  familiar  with  what  are  termed 
mass  phenomena.  He  knows  that  he  can  learn 
something  of  the  average  height  of  a  body  of 
people  by  studying  the  heights  in  a  group  of  a  few 
thousands  of  people  drawn  at  random  from  the 
larger  body.  Provided  that  the  smaller  group  is 

110 


THE  MARKET 

so  selected  as  to  insure  that  it  is  typical  of  the 
larger  body,  and  provided  the  group  is  large 
enough  to  render  the  law  of  averages  applicable, 
the  statistician  knows  when  he  has  determined  the 
average  height  of  the  smaller  group  that  it  will 
roughly  coincide  with  the  average  height  of  the 
larger  group. 

This  method  of  study  can  be  applied  by  the 
business  man  in  testing  the  ideas  and  forms  of 
expression  to  be  used  in  a  selling  campaign.  In 
direct  advertising,  the  mailing  of  selling  letters,  cir- 
culars or  catalogues  to  prospective  purchasers  to 
draw  from  them  an  order  for  goods  as  an  evidence 
of  awakened  demand,  you  have  a  stimulus  and 
response  adapted  to  direct  statistical  measurement. 
The  number  of  responses  per  thousand  communica- 
tions can  be  determined.  Here  is  the  agency  that 
the  business  man  can  employ  in  testing,  under 
what  are  equivalent  to  laboratory  conditions,  the 
ideas  and  forms  of  expression  that  seem  to  him 
best  adapted  to  awaken  a  demand  for  his  product. 

Suppose  the  manufacturer  of  a  food  product  is 
planning  a  campaign  to  reach,  not  the  consumer, 
but  the  grocers  of  the  country.  Now  the  whole 
body  of  dealers,  large  and  small,  handling  groceries 
numbers  something  like  250,000.  Let  the  distrib- 
utor, after  working  out  a  set  of  ideas  and  forms  of 
expression  which  seem  to  him  likely  to  be  effective 
in  arousing  the  desired  demand,  test  this  material 

ill 


MARKET  DISTRIBUTION 

by  mailing  it  to  say  1,000  grocers.  The  group 
selected  must  be  large  enough  to  give  typical  re- 
sults and  it  must  be  so  selected  as  to  be  represen- 
tative in  character  of  the  whole  body  of  grocers. 

Granting  these  elements,  the  distributor  can 
determine  the  number  of  responses  from  the  1,000 
grocers  to  whom  the  communication  was  sent,  and 
can  estimate  from  that  result  the  average  re- 
sponse per  thousand  of  communications  that  would 
have  been  obtained  if  the  same  ideas  in  the  same 
form  of  expression  had  been  conveyed  to  the  whole 
body  of  250,000  dealers  in  groceries  in  the  country. 
He  can  then  test  by  means  of  direct  mailing  to 
another  group  of  1,000,  a  varying  set  of  ideas  or 
varying  form  of  expression.  And  so  on  with 
other  modifications  of  the  selling  material.  Thus 
it  will  be  possible  to  determine  what  ideas,  in  what 
arrangement  and  in  what  form  of  expression,  are 
most  effective  to  arouse  the  desired  demand. 

That  the  plan  suggested  is  practical  is  indicated 
by  the  results  of  such  an  intensive  study  presented 
in  Table  I.  Here  are  shown  the  results  of  "  tests  " 
and  the  results  of  complete  mailings.  The  tests 
here  covered  only  one  stratum  of  society,  a  mailing 
list  of  bankers  being  used.  The  purpose  of  the 
selling  material  mailed  was  to  obtain  orders  for 
certain  publications.  Various  forms  of  "  copy  " 
were  tested  by  mailing,  usually  to  500  names  on 
the  list.  Where  the  return  on  any  test  exceeded 

lie 


THE  MARKET 

the  minimum  standard  of  twenty  orders  per  thous- 
and communications  the  material  was  mailed  to 
the  complete  list.  In  only  one  case  did  the 
complete  mailing  fail  to  show  an  average  return 
per  thousand  communications  substantially  the 


BANKERS'  TESTS 
MINIMUM  STANDARD  =  20  PER  M. 


Material 

Mailed 

Tests 

Mailings 

Date 

No.  of 
pieces 
mailed 

Total 
orders 
received 

Mo.   per 
M. 

Date 

No.  of 
pieces 
mailed 

Total 
orders 
received 

Mo.   per 
M 

1909 

1909 

A1 

3/30 

500 

3 

6 

A2 

3/30 

500 

5 

10 

B1 

8/13 

500 

6 

12 

B2 

9/13 

500 

3 

6 

C1 

9/15 

500 

4 

8 

C2 

9/15 

500 

3 

6 

D1 
D2 

9/15 
9/15 

453 
500 

6) 
18  / 

„{ 

9/27 

19,943 

360 

18 

E 

9/16 

500 

7 

14 

pi 
p 

9/21 
9/21 

500 
500 

24| 
12  / 

36  | 

11/23 

16,511 

589 

35 

G 

10/18 

1,000 

30 

30 

11/28 

21,790 

643 

29.5 

1910 

H 

11/16 
1910 

500 

11 

22  j 

1/24 
1/24 

6,554 
16,039 

1651 
390  J 

24 

I 

4/11 

4/11 

500 
500 

12  1 
12  J 

«{ 

5/5 
5/4 

6,810 
12,154 

1451 
336  J 

25 

Note.  —  Where  the  same  letter  appears  with  different  exponents  under  "  material 
mailed  "  it  indicates  that  on  the  test  mailing  results  were  kept  separately  for  the 
same  material  mailed  to  two  small  groups. 

113 


MARKET  DISTRIBUTION 

same  as  that  derived  from  the  test  mailing.  In 
the  case  of  Test  D1,  mailed  September  15,  1909, 
the  return  is  clearly  out  of  proportion  to  the  results 
from  the  mailing.  The  same  material  mailed  on 
the  same  date,  however,  (Test  D2),  gives  for  a 
similar  small  group  a  return  much  closer  to  the 
results  obtained  from  the  final  mailing.  When  a 
minimum  standard  as  low  as  twenty  is  used,  and 
the  test  group  numbers  only  500,  there  is  danger 
that  the  average  will  be  disturbed  as  by  one  indi- 
vidual sending  in  several  orders.  The  larger  the 
test  group  the  more  exact  an  index  will  it  give  as 
to  the  results  which  will  be  obtained  from  a  com- 
plete mailing. 

This  method  of  studying  ideas  and  forms  of  ex- 
pression in  direct  advertising  would  be  important, 
even  though  its  usefulness  did  not  extend  beyond 
direct  advertising.  It  would  permit  one  to  guide  a 
widely  extended  direct  advertising  campaign  by  an 
investigation  relatively  inexpensive. 

But  the  importance  of  the  method  described  does 
not  end  with  direct  advertising.  Remember  that 
the  root  idea  is  the  same,  whatever  the  agency  for 
selling  employed.  Selling  is  accomplished  by 
communicating  to  the  possible  purchaser  ideas 
about  the  goods  calculated  to  stimulate  in  him  a 
desire  for  the  goods.  These  ideas  may  be  com- 
municated through  middlemen,  salesmen,  general 
advertising  or  direct  advertising.  Since  the  ideas 

114 


THE  MARKET 

are  the  same,  whatever  the  agency  for  communi- 
cation, the  business  man  can  determine  in  his 
direct  selling  laboratory,  what  ideas  and  in  what 
combination  are  the  most  effective  selling  material. 
He  can  then  carry  over  into  his  selling  by  other 
agencies  the  knowledge  there  obtained. 

Suppose  an  extensive  campaign  through  period- 
icals is  under  consideration.  The  distributor  con- 
templates spending  perhaps  hundreds  of  thousands 
of  dollars  upon  advertising  in  certain  periodicals. 
What  can  the  "  distribution  laboratory  "  do  to 
determine  the  ideas  to  be  conveyed  and  the  forms 
of  expression  to  be  used  to  create  the  desired 
demand  ?  Now  the  circulation  of  a  periodical  to 
be  used  may  run  into  the  hundreds  of  thousands  or 
even  into  the  millions.  The  business  man  wishes 
to  test  the  response  that  will  result  from  the  com- 
munication to  this  enormous  body  of  subscribers 
of  certain  ideas  expressed  in  certain  forms.  Not 
only  can  he  work  out  the  most  effective  ideas, 
the  most  effective  arrangement,  and  the  most 
effective  forms  of  expression  through  the  agency 
of  direct  mailing,  but  he  can  even  test  the  final 
"copy"  itself,  just  as  it  will  appear  in  the  peri- 
odical, by  mailing  it  directly  to  relatively  small 
groups. 

Moreover,  he  can  test  the  response  to  it  found  in 
differing  strata  of  society.  Ideas  adapted  to  build 
up  a  demand  for  a  commodity  in  one  economic 

115 


MARKET  DISTRIBUTION 

or  social  stratum  may  prove  ineffective  when 
dealing  with  another,  The  importance  of  this 
method  lies  in  the  fact  that  most  periodicals  circu- 
late within  certain  fairly  well-defined  economic  and 
social  strata.  The  ideas  and  forms  of  expression 
that  are  most  effective  in  one  periodical  hence  may 
be  relatively  ineffective  if  used  in  another  that 
reaches  a  different  stratum. 

Equally  important  is  the  application  of  the  sug- 
gested method  of  study  to  selling  through  salesmen. 
The  more  progressive  business  men  today  train  the 
salesmen  in  a  certain  basic  "  selling  talk."  That 
is,  certain  ideas,  arranged  in  a  certain  order  and 
expressed  in  certain  forms  are  impressed  upon  them 
as  likely  to  build  up  a  demand  for  the  article  on  the 
part  of  possible  purchasers.  The  basic  "  selling 
talk  "  is  not,  of  course,  repeated  parrot-like  by  the 
salesman,  but  it  does  serve  as  a  foundation  for  his 
talks  to  possible  buyers. 

Here  again  the  laboratory  idea  can  be  applied. 
The  whole  structure  of  the  selling  talk  can  be  built 
up  on  the  ideas,  order  of  arrangement,  and  forms  of 
expression  established  as  the  most  efficient  in 
creating  demand  through  the  medium  of  direct 
advertising.  One  need  but  appreciate  the  funda- 
mental identity  of  the  selling  function,  through 
whatever  agency  exercised,  to  realize  that  the 
results  obtained  in  experiments  in  direct  advertis- 
ing can  be  carried  over  to  selling  by  salesmen. 

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Note,  too,  that  the  general  principles  upon  which 
the  "  testing  "  method  depends,  apply  when  we 
seek  to  study  the  possibilities  of  the  whole  market 
by  the  intensive  cultivation  of  one  section  of  it. 
A  localized  selling  campaign,  narrow  in  extent, 
will  give  relatively  exact  data  from  which  the 
possibilities  of  a  nation-wide  campaign  of  like 
character  may  be  judged.  Obviously,  if  our  law 
of  averages  holds  good,  we  may  carry  over  the 
results  obtained  in  one  section  to  other  sections, 
and  hence  at  small  cost  guide  a  widespread  cam- 
paign. 

The  exact  data  that  can  be  obtained  through 
such  "  testing  "  methods  permit  a  more  scientific 
consideration  of  the  decreasing  returns  obtained  if 
one  agency  is  used  beyond  a  certain  point.  Hence 
a  better  combination  of  agencies  is  possible,  with  a 
view  to  the  greatest  aggregate  efficiency. 

THE  EFFECT  OF  DIFFERENT  PRICE  POLICIES 

When  a  business  man  contemplates  putting  a 
new  product  on  the  market,  a  serious  problem  is 
the  price  at  which  it  shall  be  sold.  In  the  intro- 
duction of  a  safety  razor,  for  instance,  at  what 
price  is  it  to  be  sold  ?  In  such  a  case  the  busi- 
ness man  seeks  to  determine  which  price  will  give 
him  the  best  net  return,  all  things  considered.  Now 
the  method  of  study  developed  above  will  per- 
mit the  business  man  to  determine  by  actual  test 

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MARKET  DISTRIBUTION 

the  effective  demand  that  can  be  built  up  at  different 
price  levels  in  different  economic  and  social  strata. 
Hence  he  can  fix  the  price  on  the  basis  of  relatively 
exact  data,  rather  than  on  a  mere  guess. 

Again,  the  laboratory  method  here  suggested 
lends  itself  to  a  determination  of  what  elements  of 
quality  and  service  in  a  given  product  are  deemed 
most  essential  by  the  consumer.  The  effective- 
ness of  the  ideas  conveyed  in  building  up  a  demand 
reflects  the  intensity  of  human  wants  as  to  the 
elements  of  quality  and  service  described.  The 
producer  can  sound  the  consumer  and  can  better 
adapt  his  product  to  the  consumer's  felt  needs. 

Thus  an  entire  selling  campaign  can  be  directed 
on  the  basis  of  what  may  be  termed  laboratory 
study.  The  empirical  methods  of  the  ordinary 
business  man  may  be  supplemented  by  scientific 
methods  that  have  proven  efficient  in  other  fields. 

The  above  practical  suggestions  have  been 
directed  primarily  to  the  business  man  struggling 
with  his  immediate  problems.  Yet  it  may  be  well 
to  emphasize  once  more  the  social  importance  of  the 
suggestions.  It  is  not  merely  that  a  large  annual 
waste  in  advertising  can  be  eliminated.  Our 
whole  system  of  distribution  is  in  chaos.  And  the 
chaotic  conditions  in  distribution  mean  that  matter 
is  ill-adjusted  in  form  and  place  to  human  wants. 
Only  as  systematic  and  widespread  study  along 
the  lines  indicated  is  given  to  the  problems  of 

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THE  MARKET 

distribution,  can  we  build  up  an  organized  body  of 
knowledge  as  to  the  facts  and  principles  involved. 
And  only  on  the  basis  of  an  organized  body  of 
knowledge  about  distribution  can  we  hope  to  work 
out  a  more  efficient  organization  of  distribution. 

And  to  this  end  the  business  man  must  cooperate 
with  the  scientist  of  the  university.  Much  can  be 
done  by  the  trained  student  in  his  laboratory  or  in 
his  study  that  will  be  of  practical  value  in  making 
possible  a  more  efficient  organization  of  distribu- 
tion. The  experimental  psychologist  can  do  much 
to  work  out  general  principles  that  will  aid  the 
business  man  in  solving  definite  selling  problems. 
The  difficulty  has  been  that  the  laboratory  worker 
does  not  have  the  specific  problems  of  the  business 
man  brought  to  his  attention. 

Similarly,  the  universities,  through  investiga- 
tors trained  in  economics,  can  gather  and  correlate 
data  upon  distribution  that  will  be  of  enormous 
practical  value.  They  should,  through  research 
bureaus,  study  such  problems  as  the  cost  of  dis- 
tribution in  the  various  industries  at  different 
stages.  And  gradually  a  body  of  organized  knowl- 
edge of  the  actual  facts  of  business  will  arise.  It  is 
by  development  along  such  lines  that  future  im- 
provements in  the  system  of  distribution  will  be 
made  possible. 


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Date  Due 


A     000  181  586     9 


